I was just looking at the jury verdict in this patent infringement case. Stryker sued on about twenty claims patents coming from three different patents. The jury found the patents infringed and not invalid.
The damages section of the verdict has three interesting elements.
Backup Award: The court asked the jury to decide both lost-profits and, as a backup, a reasonable royalty. That approach stems from the patent statute that sets reasonable royalty as a floor for compensatory damages. The jury found that Stryker had proven lost profits of $70 million and alternatively should be awarded 25% royalty on Zimmer's the $254 million in revenue from infringing sales. Assuming the verdict holds up, Stryker should receive $70 million lost profit award since it is greater than the $63 million reasonable royalty calculation. This is area where a more detailed verdict form actually helps the plaintiff.
Creating Its Own Form: Part of the power of jury verdicts is that they operate as a black-box decision making tool. Since the jury does not explain its decision, it is difficult to point out errors in that decision making process on appeal. The losing party often has to resort to the difficult task of proving that no reasonable jury could have reached the ultimate conclusion based upon the evidence. In this case, the jury may have given the defense a bit of a boost. In addition to setting the reasonable royalty at 25%, the jury added its own explanation – writing that the 25% is "double initial percentage of [a low comparable] license as we felt 32.2% [requested by the plaintiffs] was too high." We'll see whether the defense is able to use this added tidbit to challenge the verdict.
Three Patents, One Royalty: The theory for calculating damages when multiple patents is a bit dicey and ill defined. Here, three patents were at stake and the jury was asked "Do you find that the reasonable royalty rate would be any different if fewer than all three of the patents in suit are valid and infringed?" The jury answered "no." That response creates some hypothetical problems – most pointedly would be whether this result is the same if the patents were each held by a different entity.
Bowman v. Monsanto Company (SCOTUS 2013) Transcript
The Supreme Court heard oral arguments today in the patent exhaustion case involving Monsanto's glyphosate-resistant soybeans. Acting in a pro bono basis, Mark Walters represented Mr. Bowman, the Indiana farmer accused of patent infringement. Decidedly not pro bono, Seth Waxman represented Monsanto, and Melissa Arbus Sherry spoke on behalf of the US Government.
My expectation here is that the court will side with Monsanto and find that a sale of patents seeds does not exhaust the patent rights as to progeny seeds that are grown. I will not be surprised if that result is 9-0. I suspect that there will also be a concurring opinion arguing that the Federal Circuit's conditional sale doctrine is bad law and that restrictions on the use of personal property do not normally bind subsequent purchasers who are not privy to that restriction agreement – regardless of whether the personal property is covered by a patent right.
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There are two major questions at stake: (1) what is the scope of patent exhaustion for goods that are naturally self-reproducing; and (2) to what extent do use restrictions placed on a licensed grower (or manufacturer) persist as servitudes that create potential liability for downstream purchasers.
Everyone agrees that the first authorized and unrestricted sale of a patented article exhausts the patent rights in that particular article and allows the purchaser to use and sell the article without fear of patent liability. Bowman argues that, for seeds, this right to use includes the right to sow the seeds and use the harvest. Under Bowman's construct, once a seed is sold without restriction, the patent rights are exhausted to that seed and to its generations of progeny. Bowman's argument also relies upon the disputed assumption that the patent rights covering the initial seeds he purchased were actually exhausted. Monsanto has kept tight control over its product throughout the years and always requires farmers who want to plant its seeds to sign a technology licensing agreement. That agreement includes a promise not to save and replant seeds. Monsanto has argued that use restriction (or license limitation) is binding on subsequent purchasers – even those who purchase the seeds in a fungible commodity market without agreeing to any restriction. Thus, for Bowman to win, the court needs to find (1) that the rights in the original seeds were exhausted by the time Bowman purchased them from the commodity market and (2) that the exhaustion applies to all future progeny of the seeds. So far, the courts have sided with Monsanto.
Out of the gate, a plurality of justices appeared concerned about the policy implications of a decision in favor of Bowman.
Chief Justice Roberts: Why in the world would anybody spend any money to try to improve the seed if as soon as they sold the first one anybody could grow more and have as many of those seeds as they want?
There are several ways to answer this question: (1) an innovator could use contract law to ensure a better market structure; (2) patent rights are rarely sufficient alone to ensure profit; and (3) that soybeans are not really fungible in the way that you might think. The Court already knew the first two answers wanted to explore the third.
Mr. Walters: [S}eed that's available at a grain elevator is not a very good source of seed and farmers are not going to be able to eliminate the need to go to Monsanto or the other seed companies every year by going to the grain elevator. . . . Taking our example here where — where Petitioner bought commodity seeds, it's an undifferentiated mixture, it can't be overemphasized how different every single seed is, you don't know a Monsanto from a Pioneer from an Asgrow. You don't know the maturity rate. If I am a farmer, I need a particular maturity bean for my field because I don't want it to mature before it gets high enough for the combine to come around and cut it.
So you want to be able to have — you have all these things dialed in, these different variabilities. So if you go to the grain elevator and you don't know what exactly it is that you want and you just get a mixture, that's not going to be real -competitive at all to Monsanto's first generation seed. Now, the possibility of somebody selecting one and saying, ah, that's the exact one that I need for my field, I'm going to cultivate that and let it grow into enough seeds so I can plant my first crop, that would take a number of years to grow a 1,000-acre farm, and it's not — and by that time, farmers — the nature would have changed and evolved where you would want the latest disease resistance by that point….
Justice Scalia: Some of them would — would grow at different rates than others.
Mr. Walters: Absolutely. . . .
Justice Scalia: The original batch that he buys from Monsanto, in addition to being resistant to the chemical that kills the weeds, in addition to that, they all mature at the same rate.
Mr. Walters: Exactly. They're a uniform variety. They are exactly what a farmer needs …
Justice Scalia: So all the Monsanto seeds are not — are not fungible.
In addition to these elements, both Ms. Arbus Sherry and Mr. Waxman explained that the seed lines are additionally protected by PVPA certificates and that grain elevators are sales are prohibited by state and federal law from labeling its commodity goods as seed.
On the actual law of exhaustion Mr. Walters did not appear to fare so well.
Justice Sotomayor: I'm sorry. The Exhaustion Doctrine permits you to use the good that you buy. It never permits you to make another item from that item you bought. So that's what I think Justice Breyer is saying, which is you can use the seed, you can plant it, but what you can't do is use its progeny unless you are licensed to, because its progeny is a new item.
Mr. Walters: This is obviously a brand-new case where we're dealing with the — the doctrine of patent exhaustion in the context of self-replicating technologies.
It was around this point that Justice Breyer gave his best one-liner of the day, declaring that "three generations of seeds is enough." (see Buck v. Bell).
The government's Ms. Arbus Sherry began her discussion with a somewhat disingenuous parade of horribles that was quickly countered by Justice Scalia his is well known for his parades.
Ms. Arbus Sherry: If the concept is the sale of a parent plant exhausts the patentholder's rights not only with respect to that seed but with respect to all the progeny seed, we would have to go all the way back to the very first Roundup Ready plant that was created as part of the transformation event. Every single Roundup Ready seed in existence today is the progeny of that one parent plant and, as Your Honor pointed out, that would eviscerate patent protections. There would be no incentive to invest, not just in Roundup Ready soybeans or not even agricultural technology, but it's quite a bit broader than that.
In order to encourage investment, the Patent Act provides 20 years of exclusivity. This would be reducing the 20-year term to essentially one and only sale. It would be near impossible to recoup your investments with that first sale and so the more likely consequence is that research dollars would be put elsewhere.
Justice Scalia: That's a pretty horrible result, but let me give you another horrible result, and that is if — if we agree with you, farmers will not be able to do a second planting by simply getting the undifferentiated seeds from a grain elevator, because at least a few of those seeds will always be patented seeds, and no farmer could ever plant anything from a grain elevator, which means — I gather they use it for second plantings where the risks are so high that it doesn't pay to buy expensive seed. Now they can't do that any more because there's practically no grain elevator that doesn't have at least one patented seed in it.
Ms. Arbus Sherry: And the answer to that is this is actually not a traditional farming practice. Despite what Petitioner says, farmers do not generally go to grain elevators, buy commingled grain, plant it in the ground as seed.
Mr. Waxman's performance appears to be a tour-de-force, although he did not push for affirmance of the Federal Circuit's conditional sale doctrine. The one area where the court focused attention was on innocent infringement.
Justice Kagan: Mr. Waxman, there is a worrisome thing on the other side, though, too. And that is the Bureau position has the — has the capacity to make infringers out of everybody. And that is highlighted actually in this case by how successful this product is and how large a percentage of the market it has had.
So that — you know, seeds can be blown onto a farmer's farm by wind, and all of a sudden you have RoundUp seeds there and the farmer is infringing, or there's a 10-year-old who wants to do a science project of creating a soybean plant, and he goes to the supermarket and gets an edamame, and it turns out that it's Roundup seeds.
And, you know, these Roundup seeds are everywhere, it seems to me. There's, what, 90 percent of all the seeds that are around? So it seems as though — like pretty much everybody is an infringer at this point, aren't they?
Mr. Waxman: …Your point about the ubiquity of Roundup Ready's use is a fair one. I mean, this is probably the most rapidly adopted technological advance in history. The very first Roundup Ready soybean seed was only made in 1996. And it now is grown by more than 90 percent of the 275,000 soybean farms in the United States.
But size — that is, success — has never been thought and can't be thought to affect the contour of patent rights. You may very — with soybeans, the problem of blowing seed is not an issue for soybeans. Soybeans don't — I mean, it would take Hurricane Sandy to blow a soybean into some other farmer's field. And soybeans, in any event, are — you know, have perfect flowers; that is, they contain both the pollen and the stamen, so that they — which is the reason that they breed free and true, unlike, for example, corn.
The point that there may be many farmers with respect to other crops like alfalfa that may have some inadvertent Roundup Ready alfalfa in their fields may be true, although it's — it is not well documented. There would be inadvertent infringement if the farmer was cultivating a patented crop, but there would be no enforcement of that.
The farmer wouldn't know, Monsanto wouldn't know, and in any event, the damages would be zero because you would ask what the reasonable royalty would be, and if the farmer doesn't want Roundup Ready technology and isn't using Roundup Ready technology to save costs and increase productivity, the — the royalty value would be zero. …
Justice Breyer: And some of the self-replicating items, which are infringing items, end up inadvertently all over the place. Is there anything — is there precautions that you take? I mean, is there anything in patent law that helps?
Mr. Waxman: So infringement is — unlike contributory infringement or induced infringement, the act of infringement, that is a violation of Section 271 is a strict liability tort, but it requires affirmative volitional contact -conduct. That is, it's not that — a thing doesn't infringe; a person infringes. …
Justice Breyer: But you're just saying that would need a modification in patent law.
On February 8, 2013 (this Friday), the Federal Circuit will sit en banc and hear arguments on two important patent cases. In CLS Bank v. Alice Corp the court will focus on the patenting of inventions implemented through software. The two particular questions highlighted in the en banc order are:
a. What test should the court adopt to determine whether a computer-implemented invention is a patent ineligible “abstract idea”; and when, if ever, does the presence of a computer in a claim lend patent eligibility to an otherwise patent-ineligible idea?; and
b. In assessing patent eligibility under 35 U.S.C. § 101 of a computer-implemented invention, should it matter whether the invention is claimed as a method, system, or storage medium; and should such claims at times be considered equivalent for § 101 purposes?
In addition to the parties, the Federal Circuit has also granted leave for the USPTO to participate at oral arguments. The USPTO’s brief focused on practical mechanisms for the process of determining § 101 eligibility. The agency wrote “the essential question under § 101 is whether the claim, properly construed, incorporates enough meaningful limitations to ensure that it amounts to more than a claim for the abstract idea itself . . . This Court should identify a non-exhaustive list of factors for district courts and examiners to consider in resolving that essential question on a case-by-case basis.”
The second patent case (argued first on the 8th) is that of Robert Bosch v. Pylon Mfg. In Bosch, the court is focusing on the “final judgment rule” that limits a losing party’s right to appeal until the district court judgment is finalized. Particularly, 28 U.S.C. § 1292(c)(2) indicates that the Federal Circuit has jurisdiction over patent appeals once the case is “final except for an accounting. The basic question on appeal is: Define “an accounting.” The en banc order asks two particular questions:
a) Does 28 U.S.C. § 1292(c)(2) confer jurisdiction on this Court to entertain appeals from patent infringement liability determinations when a trial on damages has not yet occurred?
b) Does 28 U.S.C. § 1292(c)(2) confer jurisdiction on this Court to entertain appeals from patent infringement liability determinations when willfulness issues are outstanding and remain undecided?
In its brief of the case, the U.S. Government argued that “accounting” encompasses the damage award. As such, the Government argues that appeal is appropriate once liability is determined.
At the Supreme Court, oral argument in Bowman v. Monsanto (patent exhaustion doctrine) is scheduled for February 19; and FTC v. Watson (reverse payment settlements) is scheduled for March 25. Arguments for Association for Molecular Pathology v. Myriad Genetics, Inc. have not yet been scheduled.
Allflex USA, Inc. v. Avid Identification Systems, Inc. (Fed. Cir. 2013) Download 11-1621 Panel: Lourie, Clevenger, Bryson (author)
Allflex v. Avid involves the situation where a party to litigation settles the case but seeks to preserve its ability to appeal the district court's adverse rulings by structuring the settlement agreement to include a contingency payment that turns on the outcome of the appeal. Here, the Federal Circuit imposes some constraints on parties' ability to avoid mootness through what effectively amounts to a "side bet."
Allflex sued Avid for, among other things, a declaratory judgment that it did not infringe several of Avid's patents. During the litigation, it came to light that Avid and its (former) counsel "should be sanctioned" because they had failed to disclose the existence of reexamination proceedings that were pending with respect to the patents in suit. (Due to the settlement the parties later entered into, no actual sanctions were apparently ever assessed against Avid). The court subsequently granted partial summary judgment on Allflex's inequitable conduct claim, holding that Avid's failure to disclose information about prior public use and an offer of sale was material. The court declined to enter summary jugment on the issue of intent, concluding that a genuine issue of fact remained. (Note: the court's ruling issued a few months before the Federal Circuit's en banc decision in Therasense v. Becton Dickinson.) Shortly thereafter, the parties entered into a settlement agreement under which Avid agreed to pay Allflex $6.55 million.
Comment: it's noteworthy that in this case the patent holder paid the accused infringer a substantial sum of money to settle the case. After skimming through Allflex's Complaint, this does not appear to me to be (at first glance) an instance of a reverse payment, since Allflex's complaint alleged several other claims,including breach of a settlement agreement, against Avid, and Allflex potentially stood to recover monetary sanctions. However, those who are interested in reverse payment cases may wish to take a closer look, particularly in light of the court's statement on p. 13 that "Avid is not and never was at risk of having to pay a monetary judgment on that claim, as inequitable conduct is a defense or an equitable remedy, not a claim for damages, even when it is pleaded as an affirmative claim in a declaratory judgment action."
The settlement agreement contained a contingency clause, however. Avid reserved the right to appeal the district court's grant of summary judgment of noninfringement, as well as the materiality and sanction rulings, and if it was successful in overturning any or all of those three findings Allflex would pay Avid $50,000. Avid did appeal, challenging the district court's rulings on all three issues. Allflex declined to file a brief.
In general, a party who is unhappy with the district court's rulings may not appeal those rulings after it has settled the litigation: the settlement agreement renders the case moot because the parties are no longer adversaries. For example, a patent holder who enters into an agreement with its opponent to settle the case in its entirety after the district court grants summary judgment of invalidity could not subsequently appeal the invalidity ruling.
On the other hand, where the parties agree to a sum of damages that would be paid or not paid depending on the outcome of the case on appeal, a live controversy may remain. Avid's own past illustrates this point: in a separate litigation, it had obtained a jury verdict of $26,981 for a patent that was subsequently held by the court to be unenforceable due to inequitable conduct. The parties settled all issues, but agreed that if Avid prevailed on its appeal of the inequitable conduct issue, it would recover the $26,981 in damages. Avid Identification Systems, Inc. v. Crystal Import Corp., 603 F.3d 967 (Fed. Cir. 2010). Even though the defendant in that case declined to contest the merits of the appeal, the $26,981 was "not a token or arbitrary sum introduced for the purpose of manufacturing a controversy." Id. at 972.
Here, however, the $50,000 did constitute such a "token or arbitrary sum introduced for the purpose of manufacturing a controversy." It did not reflect an actual damages award, as in Crystal Import, nor was it a "reasonable estimate of the value of any of the issues on appeal." Slip Op. at 12. Instead, it was just a number that Avid had hoped would be large enough to persuade the court that a controversy remained. The court found particularly problematic the fact that the $50,000 would be awarded whether Avid prevailed on any one or more of the issues: this indicated that the $50,000 was completely untethered to the value of any one of those issues.
The court's ultimate holding on the issue: "We hold that where, as here, the appellant has identified no relationship between the valuation placed on the appeal and the issues the appellant wishes to challenge, the parties have simply placed a “side bet” on the outcome of the appeal, which is not enough to avoid a ruling of mootness." Slip Op. at 14. There are good reasons for this rule:
When one party wishes to maximize its prospects of prevailing on an issue that has been the subject of a settlement agreement similar to the one in this case, it would no doubt be tempting to set the contingency payment at a level that would be sufficient to avoid the mootness rule of Aqua Marine, yet low enough to avoid encouraging the adverse party to participate in the appeal. As this case demonstrates, that results in the highly unsatisfactory situation in which the court finds itself with a one-party appeal, where there is no adversarial presentation and the court consequently has reduced confidence in any ruling it might enter. In some instances, as we pointed out in Crystal Import, one-party appeals are unavoidable. But where, as in this case, the appellant has failed to satisfy us that the arrangement leading to the one-party appeal reflects the existence of a legitimate, continuing case or controversy, we decline to be a party to the exercise.
A recent Third Circuit decision focuses on the impact that a bankruptcy has on a patent license. In 2009, Spansion and Apple settled a patent dispute with Spansion agreeing to end its case at the ITC and to refrain from suing in district court. The agreement stated:
Provided that neither Spansion nor any successor in interest to any of the patents being asserted in the referenced ITC action do not bring an action of any nature asserting any such patent before any legal, judicial, arbitral, administrative, executive or other type of body or tribunal that has, or claims to have, authority to adjudicate such action in whole or in part against Apple or any Apple product, Apple agrees Spansion will not be disbarred as an Apple supplier as a result of the referenced ITC action.
The agreement also particularly stated that Spansion will remain a primary supplier "for the life-time of the product" and will be considered for future platforms.
Later that year, Spansion filed for bankruptcy and the trustee moved to reject the settlement as an executory contract. The normal rule in bankruptcy (under 11 U.S.C. § 365(a)) is that the debtor (here Spansion) can unilaterally reject executory contracts if it so chooses. Any resulting contract damages will be unsecured debts that are unlikely to receive any payout. IP law has a special exception codified in 11 U.S.C. § 365(n). Under that rule, a licensee can elect to retain its license rights despite a debtor's rejection. The statute states:
If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect . . . (B) to retain its rights . . . under such contract . . . to such intellectual property . . . as such rights existed immediately before the case commenced."
On appeal, the question is whether the contract between Spansion and Apple is a license or instead merely a promise not to sue. The bankruptcy court initially held that Apple's § 365(n) election did not apply because the agreement was not a license. Reviewing that decision, the Delaware District Court found that the agreement was a license "because it was a promise not to sue." Now, the Third Circuit has affirmed the District Court with quotation from the Supreme Court's 1927 decision in De Forest Radio.
"[A] license … [is] a mere waiver of the right to sue by the patentee." De Forest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927). A license need not be a formal grant, but is instead a "consent[ ] to [the] use of the patent in making or using it, or selling it … and a defense to an action for a tort." Id. The Court of Appeals for the Federal Circuit explained that the inquiry focuses on what the agreement authorizes, not whether the language is couched in terms of a license or a covenant not to sue; effectively the two are equivalent. TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271 (Fed. Cir. 2009).
Here, the promise to "dismiss the ITC action" and "not re-file the ITC action or another action related to one or more of the same patents against Apple" was a promise not to sue on a patent and therefore is a license of patent rights.
Thus, Apple retains its license regardless of who buys the patent rights.
One question not resolved by the appeal are Apple's ongoing duties vis-à-vis the agreement. The statute calls for ongoing payment of royalties. However, it appears that there is no further monetary payment due in the agreement, although Apple has promised to keep Spansion as a supplier and consider Spansion for future contracts. If Apple is released from those commitments then it will actually be better off because of its business partner's bankruptcy – a result that is not often the case.
InterDigital v. USITC and Nokia (Fed. Cir. 2013) (en banc)
An en banc request for rehearing in the Interdigital case has been denied, but the panel majority has released a new opinion particularly addressing the patent-troll-domestic-industry question. Judge Newman has also released a new dissenting opinion.
The question in the appeal raised by Nokia is whether InterDigital's patent licensing activities satisfied the "domestic industry" requirement of section 337 of the Tariff Act of 1930, 19 U.S.C. §§ 1337(a)(2) and 1337(a)(3). Here, the court again sided with InterDigital and held that the "most natural reading" of the statute indicates that section 337 relief is "available to a party that has a substantial investment in exploitation of a patent through either engineering, research and development, or licensing." There is no requirement for manufacture by the patentee or any other domestic party. Rather, "[a]s long as the patent covers the article that is the subject of the exclusion proceeding, and as long as the party seeking relief can show that it has a sufficiently substantial investment in the exploitation of the intellectual property to satisfy the domestic industry requirement of the statute, that party is entitled to seek relief under section 337." The majority opinion was written by Judge Bryson and joined by Judge Mayer.
In dissent, Judge Newman argued that a domestic industry requires domestic manufacture. No other judge joined Judge Newman in dissent – suggesting that the majority opinion is on solid footing with the court. And the result is that NPE lawsuits in the ITC are also on solid footing. The benefit of ITC litigation is the stronger likelihood of injunctive relief and the potential of industry-wide enforcement. To collect monetary damages, that injunction would need to be translated into a license agreement.
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19 U.S.C. §1337(a)(2) creates a prerequisite to IP enforcement in the USITC that "an industry in the United States, relating to the articles protected by the patent, copyright, trademark, mask work, or design concerned, exists or is in the process of being established."
19 U.S.C. §1337(a)(3), as amended in 1988 describes the "industry in the United States" as follows:
[A]n industry in the United States shall be considered to exist if there is in the United States, with respect to the articles protected by the patent, copyright, trademark, mask work, or design concerned—
(A) significant investment in plant and equipment;
(B) significant employment of labor or capital; or
(C) substantial investment in its exploitation, including engineering, research and development, or licensing.
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Apart from jurisdiction, there has been a recent push for the USITC to consider delaying, reducing, and rejecting injunctive relief in situations where the patentee's motivation for an injunction is to force a monetary settlement. See Colleen V. Chien and Mark A. Lemley, Patent Holdup, the ITC, and the Public Interest, 98 Cornell Law Review 1 (2012). The statute provides that:
If the Commission determines, as a result of an investigation under this section, that there is a violation of this section, it shall direct that the articles concerned, imported by any person violating the provision of this section, be excluded from entry into the United States, unless, after considering the effect of such exclusion upon the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and United States consumers, it finds that such articles should not be excluded from entry.
19 U.S.C. § 1337(d)(1).
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Nokia is expected to file a petition on this issue to the Supreme Court.
In the face of Supreme Court scrutiny over its jurisdictional power, the Federal Circuit has taken a step back from its historic approach of expanding patent law jurisdictional reach.
DeRosa is the inventor of a cam-less chuck for use in a router. These have been available for some time with ordinary drills, but the large size and high rotation speed made the same type of assembly more difficult for a router. DeRosa’s provisional patent application was filed back in November 1998 and, at the same time, DeRosa assigned his rights in the invention and “further improvements” to Marmo in return for a promise that a promise that Marmo would manufacture and sell the device and that DeRosa would receive royalties on those sales.
In 2010, DeRosa sued Marmo in Virginia state court – alleging that the company had failed to live up to its continued contractual obligations to manufacture and sell the device. In the lawsuit, Marmo asked for both contract damages and a reversion of ownership rights in the patent. The case was first removed to Federal Court on diversity grounds and then removed to an arbitrator based upon the contract terms. The arbitrator found for DeRosa on breach of contract but held that Marmo was still the proper patent owner. That decision was confirmed by the E.D. Virginia District Court in an April 6, 2012 order.
On appeal, the Federal Circuit has refused to decide the case – holding that it lacks jurisdiction and that the proper venue is the Court of Appeals for the Fourth Circuit. The reason here is that the complaint did not raise any substantial questions of patent law but rather simply focused on the contract. Judge Bryson writes:
Causes of action based on contractual rights in a patent assignment or license agreement as a general rule do not arise under the patent laws. See Luckett v. Delpark, Inc., 270 U.S. 496, 502-03 (1926); New Marshall Engine Co. v. Marshall Engine Co., 223 U.S. 473 (1912). Marmo nonetheless argues that the appeal is properly before this court because the complaint specifically requests a restoration of ownership in patent rights.
That DeRosa’s complaint ultimately sought to restore ownership in the invention is of no great significance. The focus of the jurisdictional inquiry is whether the plaintiff “set up some right, title or interest under patent laws, or at least makes it appear that some right or privilege will be defeated by one construction, or sustained by the opposite construction of these laws.” Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 807-08 (1988).
The complaint in this case did not turn on such a claim. The alleged harm stated was Marmo’s failure to abide by its “contractual and financial obligations under the contract” resulting in DeRosa not having received the “bargained for benefit” of “a steady flow of manufacturing business and the timely payment for the product.” Although a restoration of patent ownership is sought in the complaint, such relief is entirely premised on the claim that Marmo’s failure to fulfill its obligations under the contract warrants a remedy of rescission. As such, this case does not arise under the patent laws, and we do not have jurisdiction.
In Jim Arnold Corp. v. Hydrotech Systems, Inc., 109 F.3d 1567 (Fed. Cir. 1997), a case very similar to this one, this court held that a plaintiff seeking rescission of a patent assignment agreement in order to restore ownership rights in a patent could not meet the jurisdictional test set forth in Christianson. As in the present case, the plaintiff in Jim Arnold had no rights in the patent without judicial intervention and was thus left only to argue that ownership of the patents should be restored based upon a breach of contract claim. Because a plaintiff under such circumstances could at best only present a frivolous allegation of ownership of the patents at issue sufficient to confer jurisdiction under section 1338, we transferred the case to the regional circuit. Since the same outcome is warranted here, pursuant to 28 U.S.C. § 1631, we transfer the case to the Fourth Circuit.
The court ignored Marmo’s most compelling argument – that the action was implicitly a move by DeRosa to quiet title in his further improvements that he later patented and now manufactures through another source. Marmo argued that mapping the contracted-for improvements to the various patents necessarily requires a substantial consideration of patent law issues. The case will now move to the Fourth Circuit to see whether the arbitration award was properly confirmed.
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Minton v. Gunn: This term, the Supreme Court is considering Minton v. Gunn, a patent litigation malpractice case. Legal malpractice is ordinarily a state law claim. Here, however, the court is considering whether the malpractice action arises under the U.S. patent laws in such a way that would confer both federal jurisdiction at the district court level and Federal Circuit jurisdiction on appeal.
America Invents Act: The Leahy–Smith America Invents Act (AIA) expanded the scope of federal jurisdiction to include cases whose only substantial patent claim is filed in a compulsory counterclaim. See 28 U.S.C. § 1295(a)(1) as amended. However, that change in the statute does not impact this case because it only applies to civil actions commenced on or after September 16, 2011.
Notice of Arbitration Awards: 35 U.S.C. § 294(d) requires that a notice of arbitration award be filed with the USPTO. Under the statute, “[w]hen an award is made by an arbitrator, the patentee, his assignee or licensee shall give notice thereof in writing to the Director.” The submission is required to include a number of details as well as “a copy of the award” itself. Under the law, that award becomes a public record and part of the patent file. As a kicker, law states that “[t]he award shall be unenforceable until the notice required by subsection (d) is received by the Director.”
In this case, the notice of award was probably not required because the statute further limits its focus to arbitration of validity or infringement issues. Here, the dispute was over contract terms and ownership.
If the Apple-Samsung patent infringement lawsuit had been litigated back in 2005, the parties would have likely settled by now. Ebay changed that calculus and now an adjudged infringer such as Samsung can afford to push cases and appeals further because there is little downside risk that a US court will actually force the company to stop distributing its well known and respected products.
In an order on December 17, 2012, Judge Koh denied Apple’s motion for permanent injunctive relief to stop Samsung from continuing to infringe Apple’s patents and trade-dress. Thus, Apple must be satisfied with the payment of money damages. Although major, the ruling is not unexpected since based both on the law (eBay) and the fact that the court previously denied Apple’s motion for preliminary injunctive relief based upon Apple’s failure to prove irreparable harm.
In order to be eligible for injunctive relief the prevailing party must show that it will suffer irreparable absent an injunction. A key to current irreparable harm doctrine is proof of the nexus between the infringement and the irreparable harm. I.e., that infringement of the particular features or designs protected by the patent right (as opposed to some other factor) will cause the loss of market share. Unlike infringement and damages, the issues associated with injunctive relief are all seen as equitable issues and therefore decided by the judge rather than a lay jury.
Here, Apple alleged three irreparable injuries: “(1) loss of market share; (2) loss of downstream and future sales; and (3) injury to Apple’s ecosystem.” The court found apple had proven injury, but apple failed to prove the causal nexus between the particular adjudged infringing acts and the irreparable harm. As it turned out, Apple did not even present an analysis of alleged harm on a claim-by-claim or even a patent-by-patent basis. In considering this, the court found that Apple’s had not proven that any of “its three [infringed] design patents covers a particular feature that actually drives consumer demand.” The same problem existed with the utility patent that was found infringed. Rather Apple’s proof was “simply too general.”
Many factors go into making a product easy to use, but the features for which Apple is asserting patent protection are very specific. A consumer may want a phone that is easy to use, but this does not establish that a tap-to-zoom feature, for example, or any given type of gesture, is a driver of consumer demand. Thus, Apple’s evidence of a survey showing the importance of ease of use as a general matter, PX 146.6, does not establish that infringement of any of Apple’s patents caused any harm that Apple has experienced. To establish the required nexus, Apple must make a showing specific to each patented feature. This, Apple has not done.
Without establishing a causal nexus between the proven harm and the proven infringement there is no room for justifying injunctive relief. Therefore Judge Koh denied relief. Apple has an immediate right to appeal this decision to the Federal Circuit even as the district court continues to decide additional post-verdict motions. To be clear, this is a major win for Samsung, but Apple still has a right to appeal and is sitting on a $1 billion verdict.
The court has also released its reasoning for denying the Samsung motion for new trial based upon juror bias. The motion was based primarily on interviews given by the jury foreman (Velvin Hogan) after the verdict. Samsung alleged that Hogan was biased and had lied during voir dire. File Attachment: Apple_Samsung_New_Trial_Denied.pdf (130 KB).
At this point, the mark-up is very much a draft. I will release a more final version once the bill is enacted. President Obama is expected to sign the bill into law at least by December 21, 2012.
The following is my introduction to the document:
* * * * *
On December ___, 2012, President Obama enacted the Patent Law Treaties Implementation Act of 2012, Public Law No 112-___ (S. 3486).
The new law is designed to implement two patent law treaties:
(1) The Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs adopted at Geneva on July 2, 1999 (“Hague Agreement”) and
(2) The Patent Law Treaty (“PLT”).
Both treaties were ratified by the Senate without opposition in 2006, and both are intended to simplify the formal obligations and reduce costs for American rights-holders when seeking patent protection outside the United States. A corollary result is that that treaty implementation also eases the obligations of foreign rights-holders when seeking patent protection within the United States.
The Hague Agreement
Implementation of the Hague Agreement creates an international design application that can serve as the basis for filing industrial design applications in countries around the world. The new provisions are codified in ten new sections of the Patent Act and a handful of amendments within the statute. See 35 U.S.C. §§ 381 – 390. In addition to the added statutory language, the USPTO is also required to “perform all acts connected with the discharge of its duties under the treaty.” 35 U.S.C. 382. One such obligation is to forward any international application to the International Bureau of WIPO who would then publish the application. Currently, most international design applications are filed directly with WIPO. However, it seems that the US structure will likely encourage applicants to file the international application in the US first.
The international design application is roughly the design parallel to the international utility patent application known as the PCT application. This should significantly reduce the cost of obtaining design protection in additional countries. Although the Hague Agreement is an important step, global industrial design laws vary widely. The next relatively small step toward harmonization would be to rationalize the various rules and laws regarding drawings in design patent applications. Drawings are especially important for design rights because those drawings typically define the scope of rights being claimed. At this point, harmonization on this front does not necessarily require further negotiations within the Hague Agreement but could instead be accomplished through bilateral and multilateral agreement between the various offices administering the design rights.
For domestic applicants, the new law extends the term of design patents by an extra year to 15-years as calculated from the design patent’s date of issuance. In the US, no maintenance fees are due and so design patents tend to remain in force for their entire 15-years unless subject to any terminal disclaimers.
International design patent applications are published soon after filing. However, an applicant can delay the publication for up to 30-months. Upon publication, those design applications will be considered prior art as of the application filing date. The publication will also create the prospect of provisional rights under 35 U.S.C. 154(d)(1) to allow a patentee to collect back-damages against unauthorized pre-issuance usage of the design by someone with actual knowledge of the pending application. For several reasons, provisional rights been only marginally useful for utility patent holders. However, there is some expectation that provisional rights will be more useful for design patent holders because (1) the patents more often cover products released on the market during the application period; (2) design inventions are more often copied but those copies easier to identify; and (3) design patents are more rarely amended during prosecution.
Patent Law Treaty
The Patent Law Treaty is a procedural treaty that is designed to limit formal and procedural requirements that countries can place on patent applicants and patentees. The Patent Law Treaty also provides a particular filing date standard.
The key change is that a utility application will now be given a filing date even if filed without claims. 35 U.S.C. 111. The quasi-requirement of drawings is also removed from the filing date requirement. Thus, the filing date requirement will now read as follows: “The filing date of an application shall be the date on which a specification, with or without claims, is received in the United States Patent and Trademark Office.” Id. Some applicants will rely upon this change to reduce the immediate transaction costs of moving from a provisional application filed without claims to a non-provisional application that previously required claims.
Purpose
This volume is intended to serve as helpful tool in understanding implementation of the new provisions of the law and should be especially helpful for those wanting to understand how the law has changed.
Highmark, Inc. v. Allcare Health Management Systems, Inc. (Fed. Cir. 2012) (Order Denying Rehearing En Banc) Download 11-1219 order Concurring opinion by Judge Dyk, joined by Judge Newman Dissenting opinion by Judge Moore, joined by Judges Rader, O'Malley, Reyna, and Wallach Dissenting opinion by Judge Reyna, joined by Judge Moore, O'Malley, and Wallach, and Chief Judge Rader in part
Earlier this year, a divided panel of the Federal Circuit held that the element of objective baselessness in an exceptional case determination is subject to de novo review as opposed to a more deferential form of review in Highmark v. Allcare. Yesterday, the Federal Circuit declined to grant en banc review of that holding, a decision that spawned two dissents signed by what now constitutes half the court. (Judge Linn assumed senior status shortly after participating the decision). As discussed below, in declining to grant en banc review the court preserved—and arguably increased—the uncertainty about which standard of review applies.
David Hricik previously wrote an extensive discussion of the panel decision in Highmark; background details are available there. Following that decision, Highmark filed a petition for rehearing en banc challenging the majority's application of a de novo standard when reviewing the issue of whether the litigation was objectively baseless in connection with an exceptional case determination under 35 U.S.C. § 285. The full court declined to rehear the appeal en banc.
The Dissenting Judges: Objective Baselessness is Reviewed for Clear Error. In an act that speaks volumes about the strength of the views of the dissenting judges, two separate judges, Judge Moore and Judge Reyna, each wrote dissents and also signed on to each other's opinions. Both dissents essentially contain the same themes: that the majority's holding regarding the standard of review in Highmark is (1) contrary to the court's own precedent; (2) inconsistent with the Supreme Court's prior rulings; (3) inconsistent with other court's approaches to similar issues in the Rule 11 and Equal Access to Justice Act context; and (4) fundamentally unsound. There are nuanced differences between the opinions; for example, Judge Reyna sharply criticizes the panel majority's over-reliance on developments in the willful infringement context, a part of the opinion that Judge Rader does not join, while Judge Moore offers a milder disagreement. The overarching point of the dissenting judges, however, is that all elements of the exceptional case determination, including that of objective baselessness, are reviewed for clear error, with deference given to the district court judge on factual determinations.
The Concurring Judges: Objective Baselessness is Reviewed De Novo. Writing in support of the decision not to grant rehearing en banc, Judge Dyk joined by Judge Newman argued that (1) the prior opinions did not involve a dispute between the litigants as to whether objective baselessness is a question of law to be reviewed de novo on appeal; (2) that Supreme Court precedent requires objective baselessness to be treated as a question of law; (3) that sections 284 (willful infringement) and section 285 (exceptional case) should be read as involving the same inquiry with the same standard of review; and (4) that policy supports de novo review of the issue of objective baselessness. Judge Dyk further pointed out that the court is in agreement on most of the legal issues in exceptional case determinations — just not this one.
Substantial Implications. The opinions of the dissenting judges raise two substantial implications. The first is the enhanced uncertainty surrounding the standard of review for exceptional case determinations. I read the dissenting judges as saying that not only do they it think the decision not to grant a rehearing en banc was wrong, but that they view the Highmark holding as invalid. Both dissents stress the point that the Highmark holding is inconsistent with the court's prior precedent. Judge Reyna also points out the well-established rule that to the extent a panel's decision on a point of law is inconsistent with an earlier panel's decision on that point, the earlier holding controls. See Reyna Dissent at 4-5. While the court acting en banc can overrule the first panel's holding, a decision not to grant en banc review of the second panel would seem not to be the same as the en banc court actually adopting the second panel's holding. As a result, it may be that the dissenting judges, who now comprise half the voting judges for en banc purposes (and in a month will comprise a majority when Judge Bryson assumes senior status), may not believe themselves bound by the Highmark holding. If this is the case, the split will continue until it is eventually resolved by the en banc Federal Circuit or the Supreme Court.
A second implication is that both Judge Moore and Judge Reyna appear to be skeptical of the court's recent holding in Bard Peripheral Vascular v. W.L. Gore that objective recklessness in a wilfulness determination is subject to de novo review, and are joined by at least two other judges in their skepticism. See, e.g., Moore dissent at 3, n. 1 ("For reasons simlar to those discussed below, this court should also revisit Bard en banc.).
The Copyright Clearance Center (CCC) is a collective agent for many copyright holders and serves as a one-stop-shop for folks to license copyrights for use. CCC offers licenses to many (perhaps most) of the academic publications (non-patent literature) submitted to the USPTO under the Rule 56 duty of disclosure. In recent years, CCC has implemented a buffet license approach that allows a business to use their entire catalog for a fixed negotiated price.
Until recently, few patent law firms have seen any copyright infringement risk associated non-patent prior art because the copies are most typically obtained from a licensed database and the submission to the PTO and file-copies are both likely fair use and therefore would not constitute copyright infringement. Thus, most firms have developed their its patent prosecution practices with an implicit belief that its prosecution related uses of scientific journal articles are noninfringing uses of the articles. In the spring of 2012, the publisher John Wiley began suing patent law firms – taking the contrary view that (1) making file copies; (2) sharing copies with clients; and (3) submitting copies to the USPTO each constitute actionable copyright infringement. These lawsuits are ongoing.
The CCC license would allow both internal copying and submitting copies to the USPTO, although it does not allow the sharing copies with clients. Of course, these actions were all previously thought to be fair use. Professor Jamie Boyle has an interesting essay from 2007 discussing the problems with this license. His main point is that once we start paying for fair use material it stops being fair use going forward and moves toward a “culture of permission” that, in his view, is normatively bad.
I contacted the CCC folks and received some information from CCC’s General Counsel Frederic Haber. The first point is that the Wiley articles that are the subject of the lawsuits are included within the license (still, the blanket license still does not include sharing articles outside of the firm). The second point is costs. CCC uses a model of basically charging on a per-professional-employee basis. For patent law firms, their current negotiated going rate is around $300 per year per registered attorney. The third point is that the form license includes a waiver of any unasserted claims of past infringement (with the caveat that the waiver only takes effect after one-year of license coverage). The fourth point is that the downside of losing a lawsuit is statutory damages.
Oblon is in a special case because the firm has the highest patent throughput of any firm in the country. Because of that, the firm would have likely been part of any upcoming second round of lawsuits. On that note, Oblon’s Managing Partner Brad Lytle writes that the “license allows us to go about our business and focus our efforts on protecting the intellectual property of our clients.” In other words, the license allows the firm to avoid the annoyance of a lawsuit. The question for firms and attorneys moving forward is (1) whether the fair use argument is sufficient and (2) whether your firm is small enough to fly under-the-radar. And, of course, there is the remaining problem that the license does not allow for the sharing of the articles with folks outside of the firm.
Update: A further communication from the folks at CCC indicates that, although “the repertory license is specifically designed for the internal use of the licensed organization”, “one exception to that general rule is that the licensee may provide individual copies (paper or electronic) to prospects, clients or customers of the licensee in response to requests from those outside people.”
Guest post by Professor Lucas Osborn, Campbell University School of Law. Before joining the academy in 2009, Professor Osborn worked on the Transocean case while at Fulbright & Jaworski, which represented Transocean.
Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc. (Fed. Cir. 2012)
Panel: Prost, Wallach, Moore (author)
This is the second Federal Circuit opinion in this litigation. Jason Rantanen wrote about the first opinion in 2010. The patented technology involves offshore deepwater drilling vessels have "dual activity" capability, which is roughly a vessel with two advancing stations that can cooperate together to drill and finish a single oil well at the ocean floor. The technology decreases the time it takes to drill and complete an oil well compared to the prior art. Since offshore drilling rigs rent for around $500,000 a day, every time savings counts. In Transocean I, the Federal Circuit overturned the district court's summary judgment finding of obviousness, noting that although Maersk provided prior art that made a prima facie case of obviousness, the summary judgment was improper in view of Transocean's significant secondary indicia of nonobviousness. On remand, the trial jury found Transocean's patents were not obvious and awarded Transocean $15,000,000 in damages. The district court granted Maersk's motion for JMOL notwithstanding the jury's verdict.
Obviousness – Secondary Considerations and Weighing the Strength of the Prima Facie Case
In Transocean I, the Federal Circuit found Maersk had made a prima facie case of obviousness based on two prior art references, and thus the remand was focused on secondary indicia of nonovbiousness. On remand, the parties fought over whether the jury could consider the two prior art references in addition to the secondary indicia evidence. Transocean, apparently believing the prima facie case was weak, wanted the jury to consider the two prior art references for two purposes: (1) to determine whether the references taught each limitation of the claims and provided a motivation to combine, and (2) to consider the strength of the prima facie case. Maersk opposed both, insisting that the only issue was the secondary indicia of non-obviousness. The district court allowed the jury to review the prior art references for both purposes. The Transocean II panel said it was error to allow the jury to reconsider whether the references taught each limitation of the claims and provided a motivation to combine: because that issue was decided in Transocean I, it was the "law of the case." On the other hand, the court held it was not error to allow the jury to weigh the strength of the prima facie case together with the objective evidence of nonobviousness.
This presents a nice strategy for patentees to (essentially) re-litigate the prima facie obviousness determination. While the jury technically does not get to decide whether a prima facie case of obviousness exists, it might be difficult for jurors to avoid forming their own opinion about the prima facie obviousness issue if it is allowed to learn about the prior art in detail.
On the ultimate issue of nonobviousness, the court reinstated the jury verdict as supported by substantial evidence. The evidence of nonobviousness included evidence of commercial success (including customers willing to pay a premium or even requiring rigs with the patented features), industry praise and unexpected results, copying (including by Maersk itself), industry skepticism, licensing, and long-felt but unsolved need. The court concluded that "Few cases present such extensive objective evidence of nonobviousness, and thus we have rarely held that objective evidence is sufficient to overcome a prima facie case of obviousness. . . . This, however, is precisely the sort of case where the objective evidence establishes that an invention appearing to have been obvious in light of the prior art was not."
The panel also held that substantial evidence supported the jury's finding of enablement.
Infringement and Damages – Option to Modify to Avoid Infringement
The court also reiterated its Transocean I holding that Maersk may have infringed even though its original contract for "sale" of the rig contained an option to modify the rig before delivery if any patent infringement was likely. The jury found that Maersk committed infringement when it "offered to sell" and "sold" its rig to Statoil. The contract evidencing the sale/offer expressly indicated that Maersk could modify the final rig design based on the outcome of then-pending district court litigation between Transocean and a third party based on the same patents. Before actually delivering the rig, Maersk modified it to avoid infringement. But the Federal Circuit reiterated that the option to modify and subsequent modification could not save Maersk. The jury found that the specifications of the rig offered and sold met all the claim limitations. Post-offer/sale modifications did not matter even though they occurred before actual delivery.
Moving to damages, the panel reinstated the jury's award, but it was sympathetic to Maersk's apparent good intentions to avoid infringement. The court stated, "We are sympathetic to Maersk's arguments. It offered drilling services which would use an infringing drill, but expressly reserved the right to modify the drill to avoid infringement. It did then modify the drill prior to delivery to avoid infringement – hence never actually using an infringing dual-activity drill." Nevertheless, the court held that the $15,000,000 reasonable royalty verdict was supported by substantial evidence.
What can defendants take away from this? A contract with an option to modify the product will not avoid infringement. It would seem defendants in situations like Maersk's (i.e., watching a patent to see if it issues or is held valid) should contract not for an "option" to modify, but for a mandatory modification to avoid infringement upon the triggering event (patent issuance or litigation upholding the patent's validity).
The Ignored Issue – When is a "Lease" a "Sale" Under Section 271?
As in Transocean I, the court did not reach a potentially dispositive issue that the parties strongly contested at times in the litigation. Section 271(a) provides that "sales" and "offers to sell" can be acts of infringement. Here, however, Maersk did not offer to sell or sell its drilling rig. Rather, it "leased" and offered to "lease" its rig to a third party. While previous cases have found that some leases can be tantamount to a sale (and thus infringe under 271), those cases primarily involved the transfer of property indefinitely or for its entire useful life (think of your typically software "license"). See Minton v. Nat'I Ass'n. of Secs. Dealers, Inc., 336 F.3d 1373, 1378 (Fed. Cir. 2003). This case presented a closer issue: Here, Maersk argued that it (1) the lease did not last for the entire useful life of the drilling rig, and (2) the contract was for the provision of drilling services and at all time Maersk maintained possession of the rig. The court ignored this issue and, as it did in Transocean I, referred to the transaction as a "sale" without comment.
From an economic perspective, "sales" and "leases" would seem to present the same harm to the patentee. On the other hand, the statute only mentions sales, not leases. For whatever reason, the Federal Circuit didn't want to touch this issue. Maybe we will have to wait for Transocean III to know the answer?
The concluding line of Sir Robin Jacob’s opinion reads as follows: “I hope that the lack of integrity involved in this incident is entirely atypical of Apple.” Apart from misleading the court on several fronts, Apple had failed to comply with the notice-of-loss publication required by the court. In the underlying decision, the UK court found that Samsung’s Galaxy devices do not infringe Apple’s iPad related design right. And, because the court was sitting in its role as a European design court, the decision has Pan-European effect. Because of the loss-of-reputation that the lawsuit has caused to Samsung, the court ordered Apple to publish the a notice as follows:
On 9th July 2012 the High Court of Justice of England and Wales ruled that [Samsung’s] Galaxy Tablet Computers, namely the Galaxy Tab 10.1, Tab 8.9 and Tab 7.7 do not infringe Apple’s Community registered design No. 0000181607-0001. A copy of the full judgment of the High Court is available from [link]
That Judgment has effect throughout the European Union and was upheld by the Court of Appeal of England and Wales on 18th October 2012. A copy of the Court of Appeal’s judgment is available from [link]. There is no injunction in respect of the Community Registered Design in force anywhere in Europe.
Instead of publishing that exact notice, Apple took a much more ballsy approach and published the following notice on its website:
Samsung / Apple UK judgment
On 9th July 2012 the High Court of Justice of England and Wales ruled that Samsung Electronic (UK) Limited’s Galaxy Tablet Computer, namely the Galaxy Tab 10.1, Tab 8.9 and Tab 7.7 do not infringe Apple’s registered design No. 0000181607-0001. A copy of the full judgment of the High court is available on the following link www.bailii.org/ew/cases/EWHC/Patents/2012/1882.html.
In the ruling, the judge made several important points comparing the designs of the Apple and Samsung products:
“The extreme simplicity of the Apple design is striking. Overall it has undecorated flat surfaces with a plate of glass on the front all the way out to a very thin rim and a blank back. There is a crisp edge around the rim and a combination of curves, both at the corners and the sides. The design looks like an object the informed user would want to pick up and hold. It is an understated, smooth and simple product. It is a cool design.”
“The informed user’s overall impression of each of the Samsung Galaxy Tablets is the following. From the front they belong to the family which includes the Apple design; but the Samsung products are very thin, almost insubstantial members of that family with unusual details on the back. They do not have the same understated and extreme simplicity which is possessed by the Apple design. They are not as cool.”
That Judgment has effect throughout the European Union and was upheld by the Court of Appeal on 18 October 2012. A copy of the Court of Appeal’s judgment is available on the following link www.bailii.org/ew/cases/EWCA/Civ/2012/1339.html. There is no injunction in respect of the registered design in force anywhere in Europe.
However, in a case tried in Germany regarding the same patent, the court found that Samsung engaged in unfair competition by copying the iPad design. A U.S. jury also found Samsung guilty of infringing on Apple’s design and utility patents, awarding over one billion U.S. dollars in damages to Apple Inc. So while the U.K. court did not find Samsung guilty of infringement, other courts have recognized that in the course of creating its Galaxy tablet, Samsung wilfully copied Apple’s far more popular iPad.
Apple has now corrected its website and will be paying additional fees to Samsung.
Kirtsaeng v. John Wiley & Sons, Docket No. 11-697 (Supreme Court 2012)
Here are a few quotes from today’s oral arguments. More discussion of the case here.
….
MR. ROSENKRANZ: (on behalf of accused infringer Kirtsaeng): What [copyright holders] got [with the passage of Section 602] was a much more powerful weapon than a contract. [A] copyright weapon gives you injunctive relief, gives you multiples of damages which you don’t get out of a contract remedy.
MR. ROSENKRANZ: The moment that a manufacturer learns that this Court says you get what we’ve called the Holy Grail of manufacturing, endless eternal downstream control over sales and rentals, you can ruin secondary markets that are competing with you, the moment that happens, that will be yet another reason for manufacturers silently to decide that they’re headed — that they’re sending their manufacturing overseas.
….
JUSTICE KAGAN: Mr. Rosenkranz, can I take you back to Justice Ginsburg’s opening question? Just as a matter of copyright theory, I had always understood [that] a copyright holder has a kind of a bundle of rights. It’s not one right that applies everywhere in the world. It’s you have your U.S. rights and you have your Chinese rights, you have your rights under each jurisdiction’s law. And your position is essentially to say that when I sell my Chinese rights to somebody, I’m also selling my U.S. rights to that same person, because the person who has the Chinese rights can just turn around and import the goods. I mean, that’s the nature of your position, isn’t it, that your U.S. rights are always attached when you sell more — your rights under the jurisdiction of another country?
MR. ROSENKRANZ: Well — so first, Your Honor, back in 1976, this notion of geographic division was very, very new, so it’s not at all clear what Congress was thinking with that — with respect to that. But secondly, no, we’re not — we’re not saying that when the owner sells his Chinese — its Chinese rights to the Chinese company, it is selling all rights. Certainly, the Chinese company cannot sell everywhere, but after that first sale, all of the manufacturer’s rights are cut off.
….
JUSTICE BREYER: I mean, an American copyright holder licenses a British company to publish the work under British copyright law. 602(a) says he can’t import the books into the United States, period…. The question is what happens when he sells it to his bookstore and you or I go in and buy it and we want to give a copy to our wife when we get back to the United States. The question is, … is that unlawful? … [What if] I bring back five copies and I give one to my son?
MR. OLSON (arguing on behalf of the copyright holder John Wiley): Well, there are fair use exceptions …
….
JUSTICE BREYER: [I]magine Toyota, all right? Millions sold in the United States. They have copyrighted sound systems. They have copyrighted GPS systems. When people buy them in America, they think they’re going to be able to resell them…. Under their reading, the millions of Americans who buy Toyotas could not resell them without getting the permission of the copyright holder of every item in that car which is copyrighted?
MR. OLSON: … that is not this case….
JUSTICE KENNEDY: You’re aware of the fact that if we write an opinion with the — with the rule that you propose, that we should, as a matter of common sense, ask about the consequences of that rule. And that’s what we are asking….
JUSTICE BREYER: I would like to know, if you were the lawyer for the Toyota distributor, and if you were the lawyer for the Metropolitan Museum of Art, or you are the lawyer for a university library, and your client comes to you and says, my God, I just read the Supreme Court opinion. It says that we can’t start selling these old books or — or lending them or putting them in our word processor or reselling the Toyota without the — without looking — displaying the Picasso without the permission of the copyright holder, who may or may not be Toyota itself. What, as their lawyer, do you tell them? Do you tell them, hey, no problem; or, do you tell them, you might become a law violator; or, do you tell them, I better litigate this? What do you tell them?
MR. OLSON: Well, each one of those situations that you posit, Justice Breyer, has a whole panoply of set of facts. With respect to the museums, with respect to the person bringing books into the United States, there are other defenses, including fair use. There are other defenses under the copyright law. But — and one of the things is that, to a certain extent, if you’re going to use the product created by someone else in a way that’s contemplated by the copyright laws, maybe it’s required that you actually comply with the copyright laws by going to the owner of the copyright and saying, look, here’s what I propose to do, can I have a license to do this?
…
JUSTICE GINSBURG: Mr. Olson, do you have an answer to the outsourcing problem and the charges that if you read the statute as you are urging, then you are inviting the outsourcing of manufacturing jobs?
MR. OLSON: There are several answers to that. One, that’s Congress’s concern. And — and there is no evidence that that would really actually happen. And Congress was concerned with creating a segmentation of the market. But it’s entirely speculative as to whether or not people are going to start manufacturing books or other items outside the United States. Congress can address that if that should become a problem, but it’s not something that was suggested as a part of what was taking place at that time.
…
JUSTICE BREYER: Well, the word has grounding. [What about the ancient principle found in] Coke on Littleton, 1628, where it says that “if a man be possessed of a chattel and give or sell his whole interest upon a condition, that condition is no good.” And Coke says, and that’s how it should be. And now that’s picked up in Bobbs-Merrill; it’s picked up in Dr. Miles. It’s been the law. Now if, in fact, there are two ways of interpreting the statute, and one is consistent with that basic principle of commercial law, and the other produces some of the complexities that you have just mentioned, isn’t it better to go with the common law and simply reaffirm a principle that’s been in the commercial law almost forever?
MR. STEWART (arguing as amicus on behalf of the US Government): I give two answers for that. And the first is that Coke was saying that, in most circumstances at least, a sale is sufficient in order to divest the owner of his prior right to control distribution, but it doesn’t say that a sale is necessary. And my point is that when Mr. Rosenkranz says the hypothetical foreign publisher who makes copies with authorization but ships … them into the United States without [authorization] could be held liable for infringement, there is nothing in section 109(a) that would allow a court to draw that distinction; that is, although 109(a) is sometimes referred to as a codification of the First Sale Doctrine, it doesn’t require an antecedent first sale. So as long as the foreign publisher was the owner of the books at the type — time they were manufactured, if those books were lawfully made under this title, under Petitioner’s reading they could be imported and distributed. We know also that this was not an oversight, that Congress didn’t intend the provision to be subject to a sort of implicit first authorized sale requirement, because the language was intended to cover copies that were made pursuant to a compulsory license.
….
No direct mention of patent law in the oral arguments.
Icon Health & Fitness v. Octane Fitness (Fed. Cir. 2012)
Following claim construction, the district court ruled on summary judgment that Octane’s elliptical machines did not infringe Icon’s U.S. Patent No. 6,019,710. However, the district court refused to find the case “exceptional” under 35 U.S.C. § 285. Under the statute, a “court in exceptional cases may award reasonable attorney fees to the prevailing party.” And, without that exceptional case ruling, the defendant had no opportunity to recoup the money spent defending the case.
U.S. patent cases follow the “American rule” that largely forbids fee shifting except in “exceptional” cases. In Cybor, the Federal Circuit described the adjudication process as involving two steps: First determining whether the case is “exceptional” and then determining the scope of fee shifting that is appropriate (if any). The court wrote:
The determination of whether a case is exceptional and, thus, eligible for an award of attorney fees under § 285 is a two-step process. First, the district court must determine whether a case is exceptional, a factual determination reviewed for clear error. After determining that a case is exceptional, the district court must determine whether attorney fees are appropriate, a determination that we review for an abuse of discretion. A district court abuses its discretion when its decision is based on clearly erroneous findings of fact, is based on erroneous interpretations of the law, or is clearly unreasonable, arbitrary or fanciful.
Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448 (Fed.Cir.1998) (en banc) (citations omitted). This process is akin to that used for enhanced damages where the court first considers whether the infringement was willful and then determines the scope of damage enhancement (if any). One key difference is that Section 285 provides the “exceptional” standard while the “willful infringement” requirement for enhanced damages was created by the court without any statutory key.
We call this the “American rule” of fee shifting because there is an alternate “British rule” that regularly awards fees to the prevailing party regardless of exceptionality of the case.
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In a short nonprecedential opinion, the Federal Circuit affirmed the denial of Octane’s exceptional case motion. Its opinion confirms the traditional stance that an exceptional case award requires significant evidence of misconduct and that denial of a motion for attorney fees is within the discretion of the trial court. “[W]e have reviewed the record and conclude that the court did not err in denying Octane’s motion to find the case exceptional.”
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Of most interest, Octane requested that the court revisit (i.e., lower) the standard for determining whether a case is exceptional. As it must, the panel here rejected that request because it is bound by prior Federal Circuit precedent. However, an en banc request on this point may garner some traction with the court.
Traditionally, there has been something of a bias relatively in favor of exceptional case findings for prevailing plaintiffs but not for prevailing defendants. The bias comes about because a prevailing plaintiff can typically include out-of-court activities such as willful infringement as part of its proof of exceptional case while a prevailing defendant can typically only prove an exceptional case based upon a patent plaintiffs activities during litigation or when securing patent rights.
I like to divide the “bad” plaintiff activities leading to an exceptional case finding into three categories: (1) inequitable conduct during prosecution; (2) litigation misconduct (such as discovery violations or destroying evidence); and (3) bringing a subjectively and objectively baseless lawsuit. Brooks Furniture Mfg., Inc. v. Dutailer International, Inc., 393 F.3d 1378 (Fed. Cir. 2005). Thus, if a prevailing defendant seeks an “exceptional case” award based upon the filing of a worthless lawsuit, the plaintiff must provide clear and convincing evidence that the infringement claims were subjectively and objectively baseless. Globetrotter Software, Inc. v. Elan Computer Group, Inc., 362 F.3d 1367 (Fed. Cir. 2004); see also Reactive Metals & Alloys Corp. v. ESM, Inc., 769 F.2d 1578 (Fed. Cir. 1985) (The person seeking attorney fees must establish the facts showing exceptionality by clear and convincing evidence.)
In its brief, Octane argued that the “subjectively and objectively baseless” requirement is unduly limiting and should be reduced to a standard that considers whether the claim was “objectively unreasonable.” Octane writes:
Patent litigation is expensive. According to a survey published in 2009 by the American Intellectual Property Law Association (“AIPLA”) the median cost for a patent litigation in which the amount in controversy is from $1-25 million, through the end of discovery, is $2.5 million (inclusive of all costs). Unscrupulous large companies know this, and, unfortunately, can use patent litigation as a weapon against competitors, especially smaller competitors. Many smaller competitors simply do not have the financial resources or wherewithal to defend a patent infringement case, no matter how spurious the contentions. Judge Story once wrote that patent litigation is the “sport of kings.” Larger companies can exploit this fact to the detriment of their smaller competitors.
Complicating matters, there is almost no economical or expeditious way for an accused infringer to extract itself from baseless litigation. Unlike certain forms of litigation ( e.g., securities litigation or antitrust litigation) rarely is a patent infringement action dismissed at the pleading stage. Rather, before a defendant accused of infringement has any hope of extricating itself from a litigation, often-times (as here) substantial discovery (both fact and expert), Markman briefing and hearing, and summary judgment briefing and hearing, must occur. By the time summary judgment is granted, substantial time is invested in the case not only by the parties, but by the district court, as well.
For their part, district court judges–who, in many instances, have no technical background and little familiarity with the patent system–are often faced with complex technology, difficult-to-read patent language and a body of case law that is both robust and nuanced. No matter how preposterous the merits of the infringement position may be, in order to reach a resolution on the merits, the district court judge must invest significant time and energy, to decipher the claim scope and understand the defendant’s position. For these reasons, no matter how unreasonable the patentee’s contentions, it is a rare district court judge who will have the courage to call a patentee’s claims “frivolous” after the investment of time and effort necessitated by these cases.
For these reasons, and because of the inconsistent application of the “exceptional case” findings by district courts, Octane proposes that in the context of a prevailing accused-infringer, the legal standard for exceptional case should be re-evaluated. Octane respectfully proposes that a case should be deemed “exceptional” if the infringement claims asserted by the patentee were objectively unreasonable. If they were objectively unreasonable (as here), then the case should be deemed exceptional, and, unless equitable considerations counsel otherwise in the context of the particular case, fees awarded. Octane’s rationale for this proposal are set forth below, as well as factors this Court might articulate to better assist district courts in identifying objectively unreasonable cases.
1. The Rationale for Fee Shifting Where a Patentee Asserts an Objectively Unreasonable Claim of Infringement Against a Competitor.
A patent grants to its holder a legalized monopoly. See Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135 (1969) (“The heart of [the patentee’s] legal monopoly is the right to invoke the State’s power to prevent others from utilizing his discovery without consent”); see also Precision Instrument Mfg. Co. v. Auto. Maint. Mack Co., 324 U.S. 806, 816 (1945) (“a patent is an exception to the general rule against monopolies and to the right of access to a free and open market.”) This is permitted because the overall good of encouraging innovation and promoting disclosure is thought to outweigh the anticompetitive effects of a time-limited monopoly. See generally Bilski v. Kappos, 130 S.Ct. 3218, 3255 (2010) (“even when patents encourage innovation and disclosure, ‘too much patent protection can impede rather than ‘promote the Progress of … useful Arts’.’ “). But a patent is, nevertheless, by its nature anticompetitive, and for this reason, the ways in which a patentee may have granted, utilize and leverage a patent are not without limit and are often carefully scrutinized. See In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1333 (Fed. Cir. 2008) (noting that patents are by nature anticompetitive and examining whether agreements improperly restricted competition beyond the exclusionary zone of the patent); see also Bilski, 130 S.Ct. at 3229 (noting “the tension, ever present in patent law, between stimulating innovation by protecting inventors and impeding progress by granting patents when not justified by the statutory design.”)
Title 35 of the United States Code, § 285 authorizes such scrutiny in the context of infringement litigation and specifically authorizes an award of attorney fees in “exceptional” cases. But what is an “exceptional” case? This Court has endeavored to provide guidance to district courts as to the meaning of an “exceptional” case. This Court has indicated that fees are properly awarded in a variety of contexts, including “vexatious or unjustified litigation” or “frivolous filings.” See, e.g., Takeda, 549 F.3d at 1388; Eon-Net LP, 653 F.3d at 1324; Waner v. Ford Motor Co., 331 F.3d 851, 857 (Fed. Cir. 2003); Bayer AG v. Duphar Int’l Research B.V., 738 F.2d 1237, 1242 (Fed. Cir. 1984). However, this Court has also indicated that absent litigation misconduct or fraud in securing a patent, a district court can award attorney fees only if the litigation is both: (1) brought in subjective bad faith and (2) objectively baseless. See, e.g., Eon-Net LP, 653 F.3d at 1324. These differing statements of the standard and other factors noted below, have led to inconsistent application of the exceptional case designation by district courts, particularly in the case of a prevailing alleged infringer.
Octane respectfully submits that commencement and maintenance of objectively unreasonable infringement contentions should be sufficient, standing alone, to deem a case exceptional. This standard is, in many ways, consistent with this Court’s cases holding that unjustified or frivolous suits may be deemed “exceptional.” Octane, however, advocates for reconsideration of the case precedent that indicates litigation misconduct or subjective bad faith should be required – in addition to baseless contentions – before finding a case exceptional.
Additionally, Octane proposes use of the words “objectively unreasonable” rather than “frivolous” or “baseless.” As explained in more detail below, the words “frivolous” or “baseless” often imply misconduct by counsel, and perhaps even violation of Rule 11. Octane respectfully suggests that an action should not have to rise to the level of a Rule 11 violation, before a case could be deemed exceptional; else the remedies are duplicative.
Rather, patentees (including non-practicing patentees) asserting their legal monopoly should at least have to assert objectively reasonable causes of action, or else the risk of paying for the litigation should shift to the patentee, regardless of counsel’s conduct. This is fair and consistent with the overarching goals of the patent system. The alternative–leaving patentees unchecked to assert thin-beyond-reason causes of action–has a huge anticompetitive impact on society and constitutes a gross injustice to innocent defendants.
As any defendant accused of patent infringement could attest, the mere existence of litigation typically has a detrimental impact on business, as customers become nervous about buying a product accused of infringement. This translates into higher costs for end customers as the patentee is able to prevent competition (often legitimate competition) and maintain monopoly prices. Meanwhile, the only recourse for a wrongfully accused infringer, apart from recouping fees under the present standard, is to bring a separate tort cause of action after conclusion of the Federal patent case in state court (which has even less experience with patent law than most district courts), or advance a cost-prohibitive antitrust action, if market share and other elements can be established. For these reasons, district courts need to know that they can find a case exceptional when a patentee fails to assert its legal monopoly responsibly and asserts and maintains objectively unreasonable causes of action.
Considerations a district court might consider when evaluating whether the patentee’s contentions were objectively unreasonable include: (1) more than one claim element was missing in the accused device, (2) the case was resolved on summary judgment, (3) the patentee was not practicing the claimed invention, (4) the patentee’s claim of infringement was based on a claim construction position that: (a) contradicted the prosecution history, or (b) read a limitation out of the claim entirely, or (c) was not rationally related to what was actually invented, (5) the patentee ignored or reargued the court’s claims construction, (6) the accused device incorporated technology that pre-dated the asserted patent, in lieu of the technology disclosed in the patent-in-suit, and (7) the accused infringer communicated to the patentee near the start of the case an alleged design around or element(s) not present in the accused product; the patentee proceeds forward unreasonably; and the defendant ultimately prevails on that issue.
Octane submits that the above factors are examples of factors a district court may consider when determining if a case was objectively unreasonable. These factors encourage early candid discussions between the parties and potentially fosters early settlement, which has been recognized as a laudable goal of the judicial system. Foster v. Hallco Mfg. Co., Inc., 947 F.2d 469, 477 (Fed. Cir. 1991). Moreover, the standard appropriately shifts the risk of fees to a patentee that proceeds forward with weak claims having no reasonable chance of success. Accused infringers should not have to bear the heavy cost of patent litigation where patent owners proceed forward with no more than a scintilla of hope or a desire that the accused infringer will collapse when confronted with a weak claim.
To be clear Octane is not proposing that “exceptional case” means any case in which an alleged infringer prevails. But cases that are objectively unreasonable should be “exceptional”, and not the norm. The cost of spurious infringement claims should be borne by the patentee, not the alleged infringer trying to compete fairly in the marketplace. In those instances (instances which would be even less frequent under this standard than at present), fee shifting is appropriate.
2. Exceptional Case Status Should Not Require Proof of a Rule 11 Violation.
By calling for a standard that allows for the award of fees in “objectively unreasonable” cases Octane is not necessarily arguing for a departure from the line of cases that would allow an award of fees in “frivolous” or “baseless” cases. However, Octane is proposing that the “exceptional” case standard of 35 U.S.C. § 285 should not be commensurate with a Rule 11 violation.
To begin, Rule 11 already includes provisions for sanctions, which would render Section 285 unnecessary if they require proof of the same conduct. Fed. R. Civ. P. 11. Beyond this, labeling a case “frivolous” such that it constitutes a violation of Rule 11 is not a step that most courts take lightly, not only because of the time and money investment in these cases, but also because labeling a case “frivolous” such that it constitutes a violation of Rule 11 requires condemnation of litigation counsel’s conduct. Rule 11 provides, among other things, that by signing all materials submitted to the Court an attorney is representing that “the claims, defenses, and other legal contentions are warranted by existing law or by a non-frivolous argument for extending, modifying, or reversing existing law or for establishing new law. . .” If a case is “frivolous” under Rule 11, then a patentee’s counsel must have acted inappropriately, a conclusion that most courts are loathe to reach.
A case should not have to rise to the level of a Rule 11 violation before it is deemed “exceptional.” Pursuing objectively unreasonable claims (though perhaps not rising to the level of a Rule 11 violation), should not be the norm for patentees, and when it does occur and the patentee is unsuccessful, the case should bear the moniker of an “exceptional case.”
3. Exceptional Case Status Should Not Require Litigation Misconduct Apart from Asserting an Objectively Unreasonable Claim.
Asserting an objectively unreasonable claim is a form of litigation misconduct. Nevertheless, no separate requirement for litigation misconduct should be necessary to establish an exceptional case. A patentee that pursues an objectively unreasonable claim but otherwise responds to discovery in a timely manner, does not destroy relevant documents, shows up to depositions, etc… should still bear the cost of its competitor’s fees, when the unreasonably maintained cause of action fails. No additional litigation misconduct should be necessary.
Moreover, the Federal Rules provide for sanctions for specific litigation misconduct as it occurs. See e.g., Fed. R. Civ. P. 26(g)(3) (authorizing sanctions for improper certification of disclosures and discovery responses); Fed. R. Civ. P. 30 (providing for sanctions for failure to attend a deposition); Fed. R. Civ. P. 37 (authorizing motions and sanctions if a party fails to respond or make appropriate disclosure to discovery requests); see also 28 U.S.C. § 1927 (“any attorney. . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct”). To the extent a patentee (or its counsel) takes some action in litigation that is wrongful, drives up costs, or otherwise violates litigation rules, then the alleged-infringer may bring that conduct to the district court’s attention at the appropriate time, and the district court should order appropriate sanctions, including fines. Encouraging district courts to deal with litigation misconduct in this manner, promotes professionalism and civility and better addresses the specific issues in a timely manner.
Though litigation misconduct could, of course, also be a factor in deeming a case “exceptional”, Octane propose that it should not be a requirement for finding a case exceptional in the face of objectively unreasonable claims.
4. Exceptional Case Status Should Not Require Proof of Bad Faith.
In a patent case, the most an accused infringer can ever hope for is recoupment of attorney’s fees and costs. Even in the rare cases where this is awarded, however, the accused infringer is not made whole. That party is still out the hundreds of hours dedicated by company personnel to the defense of the case (hours that could have been spent on research and development, sales efforts and other endeavors), not to mention the often-significant cost that the suit may have had on the accused infringer in the marketplace. Unlike on the patentee side, where the plaintiff may get treble damages against a willful infringer, the wrongfully-accused infringer has no such remedy against a patentee. The accused infringer is entitled to, at most, recoupment of reasonable fees.
Why is this significant? It is significant because under the law, subjective bad faith ( i.e., the willful, wonton or reprehensible nature of a party’s conduct), while the critical factor in an award of punitive damages (which an alleged infringer cannot recover), is not a pre-requisite, in most statutory schemes, to an award of reasonable attorney fees. See, e.g., 42 U.S.C. § 1988 (allowing court, in its discretion, to award attorney fees to the prevailing party in civil rights actions); 15 U.S.C. § 15 (mandating the award of reasonable attorney fees for any person injured by violation of the antitrust laws); 42 U.S.C. § 3613 (allowing court, in its discretion, to award attorney fees to the prevailing party in fair housing actions). In this instance, the statute merely requires that the court find the case “exceptional” before awarding fees. It says nothing about requiring a showing of subjective bad faith. Octane submits that in view of the differences between punitive damages and reasonable attorney fees and the ways in which these are typically dealt with in statutes and by the courts, an alleged infringer should not have to make a showing of subjective bad faith in order to show that an objectively unreasonable case is “exceptional.”
Regardless of intent (which is inevitably almost impossible to prove), a patentee that asserts an objectively unreasonable cause of action against its competitor should bear the risk of paying that competitors fees if it is unsuccessful.
This is an interesting problem. At the end of the case, a prevailing party has generally proven that the losing party’s case is without merit (i.e., it lost). In that sense, at the end of the case, the position is subjectively, reasonably, and objectively baseless. The question is, however, at the beginning of the case (and to some extent throughout the case) did the position have some merit?
At first cut the proposed fee shifting appears to be a good mechanism for shifting risk onto plaintiffs who, in turn, will avoid filing baseless claims. A benefit of the current rule (objectively baseless) is that it is fairly clear and so the self-weeding is easy. Octane’s multi-factor proposal makes this a much more difficult if not impossible task – meaning that the new rule would also end up discouraging some amount of valid patent claims.
Notes:
Octane is represented by Rudy Telscher and Kara Fussner of Harness Dickey’s St. Louis office. Larry Laycock and his team at Workman Nydegger in Salt Lake represent Iconn.
There is a good chance that Octane won’t push this case any further since it won the underlying decision (non-infringement) and that decision was affirmed on appeal.
Samsung Electronics v. Apple, [2012] EWCA Civ 1339
The English (and Wales) court of appeals has issued a new decision in the ongoing global intellectual property battle between smartphone competitors Apple and Samsung. This case focused on Apple's Community Design No. 000181607-0001 and affirms the trial court ruling by the High Court Judge Colin Birss that the three accused Samsung Galaxy models do not infringe. The court has also affirmed Judge Birss's equitable order forcing Apple to advertise its loss (in order to partially correct damage done to Samsung's reputation).
Apple's iPad registered community design being asserted here is the simple design shown below.
A registered European Community Design is roughly equivalent to a US Design Patent. However, the Europeans have done away with the examination process and replaced it with registration without considering whether the design is actually novel. Thus, while the European law requires that a registered community design be novel (a lower standard than nonobvious), that issue is not raised in the initial registration process. The US continues to examine design patents for novelty and nonobviousness. However, the USPTO's examination of design patent novelty can best be described as a farce. In a 2010 study, I found that the vast majority of design patent applications do not receive even a single rejection during the examination process and only 1.2% are the subject of an obviousness or novelty rejection. In that essay I identified our system as that of de facto registration. Because of the in-expense and ease of registration, Community Designs have been quite popular.
Up to now, the process of obtaining Community Designs has been largely separate from that of US design patent rights. This will change, however, if the US finalizes legislation implementing the Hague Agreement. Earlier this year the US Senate passed the "Patent Law Treaties Implementation Act of 2012" (S. 3486) that would implement the Hague Agreement (as well as the procedural Patent Law Treaty PLT). If there is no major objection, the House of Representatives is likely to pass its version of the Act in the lame duck session of Congress following the November presidential election.
The opinion in the present case is written by Lord Justice Robin Jacob who has retired from the bench but is regularly called back to hear intellectual property cases. As you will find with virtually all of Lord Justice Jacob's decisions, the case is well written, layered, and informative. Lord Justice David Kitchin (another IP focused jurist) joined the panel. In addition to the related design patent litigation in the U.S., this particular community design is being litigated in Germany, the Netherlands, and Spain.
Infringement of a community design is defined in Article 10 of the Community Design Regulation EC 6/2002 and asks whether the accused design "does not produce on the informed user a different overall impression" after taking into consideration "the degree of freedom of the designer in developing his design." Although worded somewhat differently, this standard is on track with U.S. design patent infringement law that considers whether an "ordinary observer, familiar with the prior art designs, would be deceived into believing that the accused product is the same as the patented design." In both situations, the "most important things [to be considered for infringement] are the registered design, the accused object and the prior art and the most important thing about each of these is what they look like."
Jacob, LJ, begins his opinion with a statement about copying—notably that copying is irrelevant to the infringement analysis:
3. Because this case (and parallel cases in other countries) has generated much publicity, it will avoid confusion to say what this case is about and not about. It is not about whether Samsung copied Apple's iPad. Infringement of a registered design does not involve any question of whether there was copying: the issue is simply whether the accused design is too close to the registered design according to the tests laid down in the law. Whether or not Apple could have sued in England and Wales for copying is utterly irrelevant to this case. If they could, they did not. Likewise there is no issue about infringement of any patent for an invention.
4. So this case is all about, and only about, Apple's registered design and the Samsung products. The registered design is not the same as the design of the iPad. It is quite a lot different. For instance the iPad is a lot thinner, and has noticeably different curves on its sides. There may be other differences – even though I own one, I have not made a detailed comparison. Whether the iPad would fall within the scope of protection of the registered design is completely irrelevant. We are not deciding that one way or the other. This case must be decided as if the iPad never existed.
The appellate opinion fully supported Judge Birss's initial determination that substantial differences led to a rejection of the infringement contention. In particular, when compared with the registered design, Samsung devices are thinner and have substantial surface ornamentation. Other features – such as a flat rectangular screen – the court found to so "banal" as to not contribute to the infringement analysis. The court found the rounded corners also unremarkable and of obvious function for a handheld device. Normally, an accused infringer cannot avoid infringement with use of its distinctive trademark on the product. In this case, however, the court found that Samsung's trademark name on its device helped to distinguish the device from the Apple registered design because of the label was additional ornamentation that contradicted Apple's approach of substantially lacking surface ornamentation.
Taking all this as a whole, Judge Birss could not see any infringement. In the appeal, Jacob, LJ, agreed noting that "Overall I cannot begin to see any material error by the Judge."
54. I would add that even if I were forming my own view of the matter, I would have come to the same conclusion and for the same reasons. If the registered design has a scope as wide as Apple contends it would foreclose much of the market for tablet computers. Alterations in thickness, curvature of the sides, embellishment and so on would not escape its grasp. Legitimate competition by different designs would be stifled.
European-wide declaration of non-infringement affirmed. Now, in all likelihood Apple will take its appeal to the EU Court of Justice (CJEU) who is the final arbiter of EU community design law.
Parallel Pan-European Preliminary Injunction by German Courts: Prior to Judge Birss's final decision, Apple applied ex parte for a preliminary injunction in a German court that was granted "without Samsung having an opportunity of being heard." In July 2012 (a few weeks after Judge Birss's decision) the German Court of Appeal (Oberlandesgericht) granted a pan-European preliminary injunction (interim injunction) against the Galaxy 7.7. Under community design litigation rules, Judge Birss's decision takes precedent and lifts that preliminary injunction. In his opinion, Lord Justice Jacob was highly critical of the German courts for taking that approach while the case was pending before Judge Birss sitting as a community design judge.
56. Firstly I cannot understand on what basis the [German] Court thought it had jurisdiction to grant interim relief. I do not think it did [have jurisdiction] for several reasons.
At minimum, a national court associated where interim relief is sought loses jurisdiction as soon as the court seized of the substance of the case (according to community design law) issues its decision.
In addition to wrongly hearing the case, Jacob, LJ also argues that the German Court wrongly decided the case.
61. … I regret to say that I find the Oberlandesgericht's reasoning on the merits sparse in the extreme….
62. What the Oberlandesgericht did not do was to consider Judge Birss's decision in detail. It gave only meagre reasons for saying "The Court cannot concur with the interpretation of the High Court". I regret that. …
63. … If courts around Europe simply say they do not agree with each other and give inconsistent decisions, Europe will be the poorer.
There are probably three ways to see this conflict: (1) as a lack of effort on the German court's part (unlikely); (2) as a lack of respect for UK courts (more likely); or (3) as an indication that German's support stronger design rights than do the UK courts (most likely).
The decision also suggests that the German court should force Apple to compensate Samsung for the trouble it has caused with its approach to obtaining a preliminary injunction:
Whether or not Samsung has any claim in the German courts for all the losses it has suffered as a result of preliminary measures which proved to be unjustified is obviously not a matter for us. I hope it does. If the position were the other way round, that the unjustified preliminary measures had been granted by the English and Welsh courts, the "injured" party would have a remedy under the cross-undertaking in damages which the English court normally requires as a condition of granting a preliminary measure which is not ultimately vindicated in a main trial.
At paragraph 78.
Ghost Lines in Design Patents: Although minor in the context of this appeal, Lord Justice Jacob has an interesting comment on the dotted "ghost" lines that have become common in US design patent drafting. According to the MPEP, those lines are allowed as "Environmental structure" so long as "clearly designated as environment in the specification." MPEP § 1503. The Apple registration included a dotted line frame showing the boundary of the operational portion of its screen. Samsung unsuccessfully argued that dotted line should not be given any patentable weight based upon what Jacob, LJ calls "a complicated point based on the guidelines for examination."
21. There is one other point about how the informed user would assess the registered design, a point decided by the Judge adversely to Samsung. Views 0001.1 and 0001.3 show the front of the tablet. There is a rectangular dotted line shown. Apple submitted, and the Judge accepted, that the dotted line indicated a frame below a glass face – of the kind now familiar on all sorts of touch-screen devices. Samsung ran a complicated point based on the guidelines for examination. It submitted these would lead the informed user to conclude that the dotted lines were there to indicate that a feature was not protected: thus the fact that the Samsung device does have a "frame" is to be disregarded.
22. This is faintly absurd: a bit like the notice-board reading "Ignore this notice." For if there were no dotted rectangular line, the front face of the design as registered would be entirely plain. So it would then be for the informed user to form a judgment as to whether a tablet with a frame created a different overall impression. In short, on Samsung's contention if there were no dotted lines the position would the same as if they were there.
This development if applied broadly could actually become a major source of contention and difficulty in implementing the global design rights system suggested by the Hague Agreement.
As an aside on the ghost line point, I briefly reviewed the prosecution history file of the US design patent that serves as the priority filing for the community design in this case. See U.S. Design Patent D504,889. In my review, I did not find any applicant remarks indicating that the dotted line in the frame is merely an environmental structure or indicating that the dotted line should not be considered as an element of the design patent. Judge Koh considered this issue during the US litigation of the '889 patent and agreed in dicta that "A reasonable interpretation of the dotted lines in the D′889 patent … is that the dotted lines are intended to show the inset screen below the glass-like surface. At this point, without the aid of prosecution history, evidence regarding drafting principles, or argument from the parties, the Court considers the dotted lines to most likely indicate an inset screen and are likely part of the claimed design." Apple, Inc. v. Samsung Electronics Co., Ltd., 2011 WL 7036077 (N.D.Cal. December 02, 2011). For its decision, the court cited Bernardo Footwear, L.L.C. v. Fortune Dynamics, Inc., 2007 WL 4561476 (S.D.Tex. Dec.24, 2007). In that case the court held that broken lines in a design patent were part of the claimed design because the drafter had failed to explain the significance (or significance) of the broken lines.
Notes:
David Musker has more on his Community Design blog: Class 99. As David notes, the decision includes a couple of important elements of substantive community design law including (1) the definition of an "informed user" and (2) how courts should define and consider functional features of the registered design.
In this post, I question whether copying is a required element for profit disgorgement under the design patent remedy provision of 35 U.S.C. § 289.
An important element of design patent protection is the special damages provision found in 35 U.S.C. § 289. According to the statute, design patent owners have an optional remedy available of disgorging the “total profit” of an infringer. It was this profit disgorgement that likely drove the bulk of Apple’s $1 billion award in the recent Apple v. Samsung jury decision. When the adjudged infringer is profitable, the disgorgement provision can lead to an enormous award.
Section 289 is titled “Additional remedy for infringement of design patent” and is written 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 patent cases, copying is normally not an element of proving infringement. And, although proof of copying will be important in determining punitive damages, it is also not normally an element in determining the underlying damages. In the design patent cases, copying has not traditionally been seen as required in order to seek profit disgorgement. However, in my view, a plain reading of the old statute suggests that copying may in fact be required when the infringing product does not embody the identical design found in the patent. The key phrase repeated in the statute is “colorable imitation.”
The “colorable imitation” language was included in the original 1887 legislation. By that time, however, the term was already in frequent use in trade-mark cases and implied copying.* The suggestion here is that, when the infringement falls under the “colorable imitation” prong, that a disgorgement damage award should only occur when a plaintiff offers some proof of copying. A more aggressive position (and probably less defendable position) could also argue that the statute always requires some proof of copying because “appl[ying] the patented design” implies that knowledge learned from the original is being used to create the new article of manufacture.
Assuming that the distinction for the copying requirement is between whether the infringer “applies the patented design” or “applies … any colorable imitation thereof,” it will be important moving forward to understand how to differentiate between these two.
The original design patent law review article was published in Volume 1 of the Yale Law Journal. See, Frederic H. Betts, Some Questions under the Design Patent Act of 1887, 1 Yale L.J. 181 (1892).
* The hyphen has since been removed from trademark common usage.
Over the past few years we have seen an ongoing subject matter jurisdictional battle between state courts, regional federal circuit courts of appeal, and the Court of Appeals for the Federal Circuit. The issue as raised in various context is when a complaint stating a non-patent cause of action should be considered to “arise under” the patent laws so as to ensure that the case is heard by a federal district court and subsequently by the Court of Appeals for the Federal Circuit. These non-patent / patent cases can arise in a variety of disputes, including disputes over legal malpractice, contracts and licenses, employment disputes, bankruptcy, challenges to arbitrations, and antitrust disputes.
The issue in the present case is whether state courts in Texas properly have jurisdiction over legal malpractice claims against patent attorneys (or patent litigators). Legal malpractice is generally a state law tort claim, but the Federal Courts have jurisdiction over claims arising under the patent laws. Although there is Federal Circuit precedent on point, this case actually arises from a Texas state court dismissal of Mr. Minton’s malpractice claim based upon the state court’s interpretation of federal law.
Now, the Supreme Court has agreed offer its final view on the question of when the Federal Courts (and the Court of Appeals for the Federal Circuit) have jurisdiction here. Although nominally a patent case, the case could have much broader impact because it will essentially be interpreting the generic constitutional and statutory limitation of “arising under” jurisdiction.
Background on the Dispute: The case started several years ago when Mr. Vernon Minton developed a set of software that he leased to the Texas Int’l Stock Exchange (TISE). That lease to TISE occurred more than one year before he filed a provisional patent application on the invention embodied by the product. The USPTO granted Minton U.S. Patent No. 6,014,643. However, in a later lawsuit against NASDAQ, the patent was invalidated via the on-sale bar of 35 U.S.C. § 102(b) and that invalidity finding was upheld by the Federal Circuit on appeal. Minton v. Nat’l Ass’n of Sec. Dealers, Inc., 336 F.3d 1373 (Fed. Cir. 2003). In that decision, the Federal Circuit confirmed that the lease to TISE constituted a “sale” for 102(b). In a post-judgment motion, Minton asked the district court to consider whether the use by TISE was an experimental use. However, the district court refused to consider that issue because of its untimely introduction.
The present lawsuit arose when Minton sued his patent litigation counsel (who have now joined the Fulbright & Jaworski firm). The crux of the malpractice claim is that the litigation counsel failed to timely plead the experimental use question. Minton filed the lawsuit in Texas state court and lost on a pretrial motion based upon the trial court’s judgment that Minton had failed to present “a scintilla of proof . . . to support his claims.” That no-damages judgment was affirmed by the Texas court of appeals. However, the Supreme Court of Texas took an orthogonal view and held that Texas courts actually lacked subject matter jurisdiction over case. In particular, the Texas Supreme Court held that Minton’s malpractice claim required resolution of a substantial question of patent law and therefore fell within the exclusive “arising under” jurisdiction of the federal courts and, eventually, the Court of Appeals for the Federal Circuit. This ruling gives Minton another shot at winning the case – this time in federal district court. The Texas court wrote:
This case arises out of patent infringement litigation. We consider whether federal courts possess exclusive subject-matter jurisdiction over state-based legal malpractice claims that require the application of federal patent law. The federal patent issue presented here is necessary, disputed, and substantial within the context of the overlying state legal malpractice lawsuit. Additionally, the patent issue may be determined without creating a jurisdictional imbalance between state and federal courts. We conclude that exclusive federal jurisdiction exists in this case. Accordingly, without reaching the merits of the legal malpractice claim, we reverse the court of appeals’ judgment and dismiss this case.
The 5-3 Texas Supreme Court decision follows the lead set by the Court of Appeals for the Federal Circuit in Air Measurement Tech., Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 504 F.3d 1262 (Fed. Cir. 2007) and Immunocept, L.L.C. v. Fulbright & Jaworski, L.L.P., 504 F.3d 1281 (Fed. Cir. 2007). In those cases the Federal Circuit gave a broad interpretation to arising under jurisdiction based upon the court’s congressionally mandated goal of national uniformity in the patent system. Both the Akin Gump and the Fulbright Jaworski cases were decided on the same day by the same panel and both penned by then Chief Judge Paul Michel. (Judges Lourie and Rader joined). Although the Texas court did not treat the Federal Circuit decisions as binding precedent, the Court chose to adopt the logic of those decisions. The dissent argued that the State of Texas has a strong interest in (and a regulatory scheme in place for) ensuring that Texas attorneys maintain a high level of quality and that federalism concerns suggest that many of these cases should be adjudged at the state court level. In a non-patent case, the Supreme Court approved of this more nuanced analysis of arising under jurisdiction in the case of Grable & Sons Metal Products, Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005). In 2012, the Federal Circuit has decided at least three other jurisdictional disputes over attorney malpractice. In each case, Judge O’Malley argued against federal circuit jurisdiction based upon her reading of Grable. See Landmark Screens, LLC v. Morgan Lewis & Bockius, LLP (Fed. Cir. 2012)(O’Malley, J., concurring); Byrne v. Wood, Herron & Evans, LLP (Fed. Cir. 2012)(O’Malley, J., joined by Wallach, J., dissenting from denial of the petition for en banc rehearing); and USPPS, Ltd. v. Avery Dennison Corp. (Fed. Cir. 2012)(O’Malley, J., joined by Mayer, J., concurring).
Question Presented: The attorneys challenging federal jurisdiction raised the following questions:
Did the Federal Circuit depart from the standard this Court articulated in Grable & Sons Metal Products, Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005), for “arising under” jurisdiction of the federal courts under 28 U.S.C. § 1338, when it held that state law legal malpractice claims against trial lawyers for their handling of underlying patent matters come within the exclusive jurisdiction of the federal courts? Because the Federal Circuit has exclusive jurisdiction over appeals involving patents, are state courts and federal courts strictly following the Federal Circuit’s mistaken standard, thereby magnifying its jurisdictional error and sweeping broad swaths of state law claims – which involve no actual patents and have no impact on actual patent rights – into the federal courts?
In his responsive brief, Minton reframed the question as follows:
Minton filed a legal malpractice claim against the Attorneys arising from a patent infringement lawsuit. Do federal courts have exclusive “arising under” jurisdiction where the sole substantive issue is the application of a patent law doctrine which is an essential element of Minton’s malpractice claim?
Underlying Law: As suggested by both questions presented, the underlying law on federal court jurisdiction over patent cases begins with the federal statute – 28 U.S.C. § 1338(a).
The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks. Such jurisdiction shall be exclusive of the courts of the states in patent, plant variety protection and copyright cases.
28 U.S.C. § 1338(a). There are two key phrases here. First, federal jurisdiction only exists when the civil action is considered to be “arising under [an] Act of Congress relating to patents.” Second, if federal circuit exists then it is exclusive of state jurisdiction.
Not a Constitutional Question: The statutory “arising under” language is intended to reflect the parallel language found in Article III, Section 2 of the U.S. Constitution that limits federal judicial power to cases “arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority…” However, the two sources have been interpreted somewhat differently. The constitutional “arising under” limits have been broadly interpreted to allow courts to hear cases even when the federal claim is only raised in a defense or counterclaim. See Osborn v. Bank of the United States, 22 U.S. 738 (1824). On the other hand, the “arising under” language in sections 1338 and 1331 have been more narrowly interpreted under the well pleaded complaint rule. In his 2004 article on Holmes Group, Professor Cotropia writes:
The phrase “arising under” originated from Article III of the Constitution, defining the jurisdiction of the federal court system. The Supreme Court interpreted this phrase, as it appears in Article III, to extend the constitutional grant of federal judiciary power to every case where federal law potentially forms an ingredient of a claim. Article III allowed “[t]he mere existence of a latent federal ‘ingredient’ that might in theory be dispositive of the outcome of a case . . . to bring the entire case, including ancillary nonfederal issues, within the jurisdiction of the federal courts.” An implementing statute is needed, however, for lower federal courts to exercise the powers conferred by Article III. With such an implementing statute, lower federal courts could enjoy some or all of the constitutional “arising under” grant of jurisdiction.
Christopher Cotropia, Counterclaims, the Well-Pleaded Complaint, and Federal Jurisdiction, 33 Hofstra L. Rev. 1 (Fall 2004); See also Donald L. Doernberg, There’s No Reason for It; It’s Just Our Policy: Why the Well-Pleaded Complaint Rule Sabotages the Purposes of Federal Question Jurisdiction, 38 Hastings L.J. 597 (1987).Because the Constitutional limitation has been so broadly interpreted, all of the practical discussion is focused on the meaning of “arising under” as it is found in the statutory context.
In Grable (following a long line of precedent), the Supreme Court confirmed that – under the statute – a case may “arise under” federal law even when the cause of action is purely a non-federal state-law claim. However, when the cause of action is not based on a federal claim, Grable requires (1) a substantial underlying contested federal issue and (2) that federal jurisdiction over the case “be consistent with congressional judgment about the sound division of labor between state and federal courts.” Grable interpreted the “arising under” language of 28 U.S.C. § 1331 rather than the patent jurisdictional statute of section 1338. However, in Christianson v. Colt Industries Operating Corp., 486 U.S. 800 (1988), the Supreme Court recognized that those two statutes should be interpreted in parallel.
Is Patent Law Different?: Although I wrote above that the case has non-patent implications, patent law presents some particulars that might not exist in other areas of law. These involve the particular exclusive jurisdictional statute for patent law. Thus, although state courts have jurisdiction to also decide most federal claims, they cannot decide patent claims. In addition, Congress has spoken regarding its desire for uniformity in the application of the patent laws. These stated federal interests could be sufficient to explain a difference between federal jurisdiction over patent law malpractice claims and not over say trademark law malpractice claims. The malpractice is a relatively minor question compared with jurisdiction over contract claims that involve patent rights (such as a patent license or sale). It would be a big deal if the Supreme Court opened the door to greater federal jurisdiction over these claims. As I explain in the next paragraph, I think it is unlikely that this case would be a vehicle for expanding federal jurisdiction and instead will more likely be a vehicle for contracting federal jurisdiction – at least when compared with the holdings in Akin Gump and Fulbright jurisdictional decisions discussed above.
Grable is the Supreme Court’s most recent pronouncement on this issue and that case the court tempered federal arising under jurisdiction by requiring courts to be mindful of the appropriate balance of power between state and federal courts. Despite Grable, both the Federal Circuit and now the Texas Supreme Court have continued to maintain broad jurisdictional reach over these malpractice cases. In these cases, the minority dissenting viewpoint has argued for less expansive jurisdiction. In this setup, the Supreme Court is more likely to resolve the conflict between these ranges than it is to identify a result to the extreme. In addition, in the years since Grable, there has been a continued focus and recognition of legitimizing State’s rights. This notion of the importance of State’s rights places an additional thumb the scale of reduced federal jurisdiction over these types of cases.
AIA Expands Arising Under Jurisdiction: Although not applicable for this case, the Leahy-Smith America Invents Act (AIA) has altered federal court jurisdiction in a way that overrules the Supreme Court decision in Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826 (2002). In that case, the Supreme Court interpreted the applied the well pleaded complaint rule to the Federal Circuit appellate jurisdiction statute (28 U.S.C. § 1295) in holding that patent issues raised only in counterclaims do not “arise under” the patent law in a way that creates Federal Circuit jurisdiction. The AIA amends the statute to clarify that Federal Circuit jurisdiction includes cases where the patent issue is first raised in a compulsory counterclaim. In addition, the new law indicates that “No State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents” and also provides a right of removal from state court if either party raises a claim for relief “arising under any Act of Congress relating to patents.”
Liveblogging the America Invents Act: One Year Later conference at the Indiana University Mauer School of Law. Warning and disclaimer: Quality may vary and these don't necessary reflect my opinions.
Panel 3: What did the AIA accomplish? What did it omit?
Mark Chandler (Cisco) – Not a patent lawyer; instead offers a high level perspective from tech industry.
Issues from his perspective: Predictability is a key, but certainty means different things to different people. Uncertainty in his industry is uncertainty about damages. Ranges of outcome that lead to total unpredictability about valuation. The patent system is an industrial policy; it needs to be pared with a good commercial law system where the court decisions are defined by good predictability of result. But parties aren't willing to have fruitful negotiations because of uncertainty as to damages.
Bad patents – very hard to overturn validity patents in court; estoppel provisions in inter partes reexamination made them a hard tool to use. Also, backlog of patents.
Effect of these issues was an increase value of litigation gamesmanship over the value of innovation. This was the context in which they came to the table. For his industry, uncertainty as to scope of rights/quality of rights was not as important as uncertainty over damages. But this is not something that he believes can be fixed legislatively. From the point of view of the technology industry, the AIA accomplished very little in terms of the uncertainty they care about.
In terms of bad patents, he sees the mechanisms as positive. On backlog, the funding provisions are excellent.
Looking forward, he is skeptical of having Congress dive into the damages issues. Change is coming from the courts. Judge Rader is a major mover here. Clean up the Georgia-Pacific factors is something he sees as coming.
Joinder provision – some judges, when confronted with the anti-joineder rule, are now consoldiating cases. Work needs to be done here.
Rocelle Dreyfuss (NYU) – Act focuses with laser like attention on getting a patent, but largely ignores what is being done with the patents. Her focus is on research exemptions. Long been two exemptions: Common law exemption and limited statutory Hatch-Waxman exemptions. Common law exemption has largely been undermined by CAFC, especially in Madey v. Duke and Embrex v. Service Engineering; most recently, Judge Lourie's opinion in AMP v. USPTO (Myriad).
Absence of such exception has become more worrisome over time. Earlier studies indicated that scientists largely ignored patents. More recent work has undermined this conclusion however. Studies shown that less research conducted in areas where things are patented.
Every foreign country has a substantial research exception. Japan is a good example.
Can't you always do your research off shore? But she'd like to see a strong research industry in the United States.
Overall effect of a lack of research exception has been to distort other patent law doctrines – examples: Supreme Court/Federal Circuit subject matter cases. All these cases are based on the view that patents can impact future research. To some extent, the Supreme Court's exhaustion and injunctive reliefs are based on a concern about what's going on down stream. A well drafted research exception is better served than twisting these doctrines around to allow downstream research.
Some believe (ex. Hal Wegner) that the common law will correct itself. Judge Newman's language in this vein was been picked up by Chief Judge Rader in a recent opinion. Wegner also argues that the fix would be relatively easy to accomplish with judge made law – drawing a distinction between research "on" versus research "with" a patented invention. Other commentators would go back to the commercial/noncommercial distinction. She's doubtful these will work, however. Rader's statement was part of a blistering dissent on an expansion of the statutory exemption; Judge Lourie's statement in Myriad was made just a month ago. In addition, the fix isn't as simple as distinguishing between research "on" and "with"; actual research is actually far more complex – consider the use of diagnostic patents, which could be classified as either research on or research with.
Copyright law has long had a fair use defense; it could work in patent law. But complex, so better done as a statute than as a common law rule.
John Duffy (UVA) – Likes: the new priority rule. Never been a fan of first-to-file. But this is not first to file – it's first-to-file or first-to-publicly disclose, which is a great change. Best argument for first-to-file was administrative convenience. Best argument for first-to-invent is that the lawyer shouldn't be part of the invention process. New system takes the best of both: administrative ease (have to have publicly disclosed it) and you don't have to get a lawyer to do this. Just have to get the rest of the world to follow us…
A partial accomplishment: ending asymmetric judicial review. Historically, applicants could obtain immediate judicial review of rejections, but competitors could not obtain immediate judicial review of grants. This was not good. AIA helps here, with its post-grant processes. But it still leaves significant holes in the availability of judicial review. Proposes that the PTO be subject to standard agency review – points to Exela v. Kappos, E.D. Va. (Aug. 22, 2012). May be a supreme court opinion. If the country goes to symmetric judicial review, that would be a very good thing.
A partial accomplishment: curbing claim numerosity. Patents have too many claims. Partial AIA solution: agency has power to set its own fees and thus could charge more for excessive claims. But sometimes there's a legitimate reason for large numbers of claims: legal uncertainty as to how claims will be interpreted. Ultimate problem here: departed too far from traditional principles of claim construction. We should instead focus on the invention – the contribution to the art – in interpreting claims. 261 U.S. 45, 63 (1923)
Gary Grisold (Senior Policy Advisory for the Coalition for 21st Century Patent Reform and former Chief IP Counsel at 3M) – AIA presented a great opportunity to improve the speed and efficiency of the patent system. The playbook for improving the AIA was largely derived from the 2004 NAS Report. Most of the recommendations of the 2004 report were put into play in the AIA.
Goals: effective, global patent protection efficiently obtained, maintained and enforced encouraging innovation and commercialization of innovation. Showed us some of the charts that they used when building support for the patent law. A lot of progress from 2007-2011.
Process error – in the post-grant review, it allows the public to come in and be heard just after a patent is granted. At some point, someone inserted "reasonably could have raised" judicial estoppel in PGR. Shouldn't be there. Didn't realize that this happened, though. Needs to be a technical correction to fix this.
Patent claim construction – For PGR/IPR, should patent claims should be construed the same as in validity challenges under 35 USC 282(b) rather than broadest reasonable construction?
What else might happen in the future? Best mode – still there as an obligation; this creates a weird tension for the attorney and client. Inequitable conduct – he believes that supplemental examination will have a lot of utility because firms will do extensive pre-litigation analysis. Could go further with inequitable conduct, and lessen the effect even more, for the reason that it brings so much inefficiency into the process. Experimental use exception – needs to be expanded. Could expand prior user right. Doctrine of equivalents is another opportunity for change. Funding issues are always a concern – could be more secure.
Doug Norman (Eli Lilly) – Going to talk about how in-house counsel deal with specific issues.
Move to first to file – won't preciptate a lot of change in their context, because for the past 40 years they've been living in a first-inventor-to-file world. So their proceses have not had to change. The change they feel is when they look at competitors' patents, they can better evaluate patent estates that they want to do a due dilligence study on.
Grace period and international harmonization – Europeans aren't necessarily ready to accept a grace period. Have a grace period in the US that is clear, crisp and objective. And very simple.
Fees – important to point out that after a longrunning diversion of funds away from the PTO, the PTO has feesetting authority to move forward and build a new infrastructure. It will cost users more, but if it leads to higher quality and faster service, it'll be worth it.
IPR/PGR considerations – A huge unknown right now. Hopes that patent judges really will be conservative on the issue of discovery. Is a technical amendment over the "could have raised" estoppel in PGR possible? He hopes so; otherwise, it will greatly constrain the use of PGR.
Inequitable conduct/supplemental examination – high point of the bill. Thinks it will be used quite extensively, if for no other reason to have their own patents drawn into supplemental [think he means reexam] examination. Plans on doing extensive due dilligence on patent estates they intend to acquire. (comment – I suspect that in the pharmaceutical industry, there may be strong incentive to conduct extensive due dilligence. I'm much less convinced this is the case in pretty much every other industry.). He believes supplemental examination will be revolutionary, at least in the pharma/biological field.
Favors statutory research exemptions and full repeal of best mode requirement. Related a story that OED is going to take best mode very seriously.
John Vaughn (AAU): Universities and patent reform – University technology transfer plays an important role in technology innovation in this country. Univerisity organizations worked together to present the view of the universities. Two basic objectives: wanted to support those proposals that would enhance the US patent systems' ability to produce innovation, and wanted to support those proposals that would enhance the ability to licensed. Very much shaped by 2004 NAS report.
First to invent to first inventor to file – three conditions: (1) effective grace period; (2) continuation of provisional applications; (3) strong inventor declaration (?) Worked with Congress on these.
Patent certainty – university inventions inherently have uncertainty because of their early stage nature; adding other uncertainty further complicates that uncertainty. Problem with statutory instructions on damages is that they would become a cost of doing business rather than something else.
Strongly supported the new post-grant proceedure. Agrees with others about the estoppel provision. Concern that with the estoppel provision, the procedure won't be used. But very concerned about proposals for second window, additional post-grant challenge that would allow a broad capacity to challenge patents throughout their life. This was viewed as making patents more uncertain, which would make them harder to license. Compromise: revised and changed inter partes.
Debate over prior user rights. Pre-AIA, only applied to business methods. University community hated prior user rights – viewed it as a circumvention of the patent quid-pro-quo. But at the end of patent reform, prior user rights was one of the primary obstacles at the end. They worked out a compromise – a substantial expansion of prior user rights that sufficiently protect universities.
Viewed as accomplishments: FtF – will be helpful to everyone. Post-grant review – great, problem with estoppel. Third party submisison of prior art – very helpful. Enhanced fee setting – very helpful, wished better anti-fee diversion language. Supplemental examination – very helpful, better to get rid of inequitable conduct altogether. Scope of grace period – concern over how it will actually be interpreted.
I struggle to understand the mathematicallogic in the debate over the recent expansion of the entire market value rule (contemporary EMVR) for calculating damages in patent cases. The entire market value rule is a tool that – in most cases – prevents a patent holder from using entire market value of a product as the starting point (i.e., the “base”) when calculating patent damages. In its newest incarnation, the court has rejected use of the entire market value of an infringing product as the starting point for damage apportionment. In his Patent-Damages blog, Fish & Richardson Partner Justin Barnes provides his bottom line:
[I]f a product is not separable into constituent parts, the plaintiff is not necessarily entitled to a royalty base on that product (e.g., Outlook in the Lucent case), but that if a product is separable into constituent parts, the plaintiff almost certainly is not entitled to a royalty base on the overall product (e.g., [LaserDynamics and] Cornell).
The entire market value rule makes sense when it is being used to stop a patentee from unduly claiming the bulk of the infringer’s profits. However, the absolute rule doesn’t make sense when the entire-product royalty base provides a fine starting point for calculating the value of the incremental benefit provided by the invention in suit.
Patent damages are most often calculated as a percentage royalty rate multiplied by some “base price” of the infringing product and then multiplied again by the total quantity of infringing products. This approach is suggested by the Patent Act requirement that “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, together with interest and costs.” 35 U.S.C. § 284.
The contemporary entire market value rule debate focuses on what base price to use in a situation involving a patent whose innovation is directed toward a component of a larger product. In particular, the inquiry is whether the base price should be the price of the entire multi-component product or instead some price associated with the component itself. The name for the rule comes into play because the price of the entire product is also known as the “entire market value.” Unfortunately, the name for the rule masks an important element in the royalty calculus – that the percentage royalty rate is shifted downward anytime the base price is shifted from the component price to the price of the larger multi-component product. A patented innovation may have a large impact on the value of a particular component (and thus receive a high royalty rate). Of course, that component will fit within a larger product having many other valuable components. Because so many other factors contribute to the value of the multi-component product, the percentage of value that the patented innovation adds to the multi-component product will be considerably lower. So, as the base price moves toward capturing the entire market value, the percentage royalty rate drops.
In a model with a few assumptions about rational behavior and spillover benefit allocation, the arithmetic works-out so that a small percentage royalty of the entire market value of a multi-component product is equivalent to the appropriate corresponding larger percentage royalty of the component of that product. In one scenario the patentee receives a small percentage of a large sales base and in the other case receives a larger percentage of a smaller sales base. As we drill-down to smaller component pieces, the two variables in question – percent royalty and price-per-unit – vary inversely such that the product of the two stays constant. Since the damage award is based upon the product of those two factors, the choice of whether or not to use the entire market value as a base should not impact the actual damage award. I.e., there is no mathematical sense behind a rule that favors one approach over the other. With a reasonable royalty, we are usually looking to find the infringed invention’s marginal contribution to the infringer’s activities. That marginal contribution will not vary regardless of whether base is the value of the entire product or the relevant component.
Despite this simple analysis above, the courts have begun to severely limit the use of the entire market value in calculating reasonable royalties damages. The entire market value rule stops patentees from calculating damages based upon the entire market value of an infringing product to cases where the patented feature is the basis for customer demand. This is a shift in the law that may have begun with Lucent (2009) and Uniloc (2011). In the most recent case of LaserDynamics v. Quanta Computer, Inc., the Federal Circuit added-on to the rule by confirming that the royalty base used to calculate a reasonable royalty should be the “smallest saleable patent-practicing unit.” Further, the entire market value of a product can only be used when the patented feature is provide to be the “motivating factor” for the customer purchase of the product. Merely being a but-for or “important” cause of the purchase was insufficient. The Laser Dynamics decision is likely the first major patent decision written by Judge Reyna. For his conclusion, Judge Reyna relies heavily on 2009 decision by Judge Rader where he sat by designation as a district court judge in Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279 (N.D.N.Y. 2009). In that case, Judge Rader wrote that “counsel would have wisely abandoned a royalty base claim encompassing a product with significant non-infringing components. The logical and readily available alternative was the smallest salable infringing unit with close relation to the claimed invention—namely the processor itself.”).
Limits on using the entire market value for calculation have been traced back to the 1884 Supreme Court case of Garretson v. Clark, 111 U.S. 120, 121 (1884). In that case, the patentee was awarded only nominal damages because the patentee failed to prove that it had suffered any loss or that the infringer had profited from the patented mop head improvement. In rejecting the appeal, Justice Field wrote:
When a patent is for an improvement, and not for an entirely new machine or contrivance, the patentee must show in what particulars his improvement has added to the usefulness of the machine or contrivance. He must separate its results distinctly from those of the other parts, so that the benefits derived from it may be distinctly seen and appreciated. The rule on this head is aptly stated by Mr. Justice Blatchford in the court below: “The patentee,” he says, “must in every case give evidence tending to separate or apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative, or he must show by equally reliable and satisfactory evidence that the profits and damages are to be calculated on the whole machine, for the reason that the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature.”
The plaintiff complied with neither part of this rule. He produced no evidence to apportion the profits or damages between the improvement constituting the patented feature and the other features of the mop. His evidence went only to show the cost of the whole mop and the price at which it was sold. And, of course, it could not be pretended that the entire value of the mop head was attributable to the feature patented. So the whole case ended, the rule was not followed, and the decree is therefore Affirmed.
Garretson. Now, one major difference between now and then is that in 1884 a patentee was still allowed to seek disgorgement of the defendant’s profits – something that is no longer allowed in utility patent law. Setting profits aside, Garretson appears allow use of the entire market value so long as the patentee explains the added value of the particular patented invention and how that added value contributes to the value of the whole product “so that the benefit derived from [the invention] may be distinctly seen and appreciated.” The driving factor in Garretson as in contemporary cases is to prevent overcompensation. However, the contemporary courts have not (and perhaps could not have) explained how the entire market value used as part of an apportionment analysis leads to overcompensation.
We might consider the availability of evidence. In the usual case, the value-added by an invention may be easier to see and understand at the component level because there are fewer issues to consider. On the other hand, base price information tends to be better available when looking at the entire market value of a product because that is what customers purchase – rather than looking at the value (or profit) associated with an integrated component. In situations like these where there are various legal theories available, we usually let the parties decide how to present their case according to what they believe is the best and most convincing evidence. The usual approach to intellectual property valuation is to use a variety of methodologies in the hopes that there will be some convergence on a best estimate and this is one useful methodology. In the larger context of the hypothetical negotiation, it just doesn’t make any sense that neither party would have considered the price of the final product as part of their negotiations.
Cognitive Bias: In many multi-component cases, the correct royalty rate will be <<1% of the market value. Economists would have no problem with that result, but jurors might. In particular, it may be cognitively difficult for a juror to award a royalty rate of <<1% of the base price because that number seems so small. Again, in our adversarial system we normally rely on opposing counsel to help juries through their cognitive difficulties. In the multi-component situation, what’s wrong with allowing the defendant to make the (seemingly easy and intuitive) showing that the accused product is based on thousands of innovations and equally important underlying patents that each deserve (and have received) their share of royalties and that the stacking problem means that royalties for the particular invention in question certainly could not be above say 0.002%. To avoid the small number bias problem, defendants can rescale their calculation to be something like $5 per thousand products sold. This provides a whole number base that we are all comfortable with.
Law Professors Brian Love has a nice pre-2009 article on the entire market value rule and its role in preventing patentee overcompensation. Brian J. Love, Patentee Overcompensation and the Entire Market Value Rule, 60 Stan. L. Rev. 263 (2007). However, the analysis has changed somewhat since then.
To be clear, I’m not arguing that the court should jettison the whole of the entire market value rule – just the post-2009 contemporary conception that applies the rule to prevent use of the entire product value base in an appropriate apportionment analysis.
Notes:
Although none of them completely agree with my analysis, Professors Thomas Cotter (UMN), Amy Landers (UFL), and Brian J. Love (SCU) all provided very useful comments on this essay.
Although I’m critical here of the damage jurisprudence of the Federal Circuit, at the time it was important for the court to take some steps to control damage calculations. In the background, Congress was a debating patent reform package that included provisions that would have significantly altered patentee’s damages arguments and the FTC had argued forcefully for further restrictions on patent damages. The court’s decisions then relieved the political pressure so that those provisions were eventually removed from the patent reform bill that was passed as the America Invents Act in September 2011.
The LaserDynamics case is also important because of its repudiation of settlement data in the damage calculation – especially when the settlement came at a point where the defendant was in a strategically disadvantageous position.
DeRosa v. J.P. Walsh & J.L. Marmo Enterprises (Marmo) (
By Dennis Crouch 
