Tag Archives: Damages

Bosch v. Pylon: jettisoning the presumption of irreparable harm in injunction relief

Injunctions, Patent, Patent Cases 2011, ,

By Jason Rantanen

Robert Bosch LLC v. Pylon Mfg. Corp. (Fed. Cir. 2011) Download 11-1096
Panel: Bryson (dissenting-in-part), O'Malley (author), Reyna

This is a very important Federal Circuit decision that firmly eliminates the presumption of irreparable harm in the context of injunctive relief.  While laying this issue to rest, however, the court offers an alternative idea: that even post-eBay, courts should (and implicitly must) consider the fundamental nature of patents as property rights when conducting an injunction analysis.

Wiper bladeThis case involves wiper blade technology.  Bosch, the patent holder, sued Pylon for infringement of a set of wiper blade patents.  At the trial court level, Bosch prevailed on a jury finding of validity and infringement before requesting entry of a permanent injunction.  The district court denied the injunction and Bosch sought interlocutory appeal of the denial while the damages determination was pending.

The presumption of irreparable harm is dead. Much attorney and commentator ink has been spilled over whether the presumption of irreparable harm following judgment of infringement and validity survived eBay Inc. v. MercExchange, L.L.C.  The Federal Circuit's opinion in Bosch v. Pylon should put an end to any further debate.  "We take this opportunity to put the question to rest and confirm that eBay jettisoned the presumption of irreparable harm as it applies to determining the appropriateness of injunctive relief."  Slip Op. at 10.  Although not expressly stated by the court, the unequivocal implication is that this is as true for preliminary injunctions as it is for permanent injunctions.

Long live the requirement that courts acknowledge the fundamental nature of patents as property rights! While affirming the death of the presumption of irreparable harm, Bosch simultaneously suggests an alternative approach that perhaps may turn out not all that different: the importance of recognizing that patents are property rights when performing the injunction analysis.

Although eBay abolishes our general rule that an injunction normally will issue when a patent is found to have been valid and infringed, it does not swing the pendulum in the opposite direction. In other words, even though a successful patent infringement plaintiff can no longer rely on presumptions or other short-cuts to support a request for a permanent injunction, it does not follow that courts should entirely ignore the fundamental nature of patents as property rights granting the owner the right to exclude.

Slip Op. at 11. In other words, "While the patentee’s right to exclude alone cannot justify an injunction, it should not be ignored either."  Id. 

In the end, however, Bosch makes little use of this new approach, instead focusing on other types of errors committed by the district court.   Thus, it remains to be seen whether a failure to consider the "fundamental nature" of patent rights will be grounds for reversal. 

Reversal of district court denial of permanent injunction: In reversing the denial of an injunction, the court applies an approach reminiscent of the Supreme Court's own jurisprudence in recent years. 

Over the past quarter-century, this court has encountered many cases involving a practicing patentee seeking to permanently enjoin a competitor upon an adjudication of infringement. In deciding these cases, we have developed certain legal standards that inform the four-factor inquiry and, in particular, the question of irreparable harm. While none of these standards alone may justify a general rule or an effectively irrebuttable presumption that an injunction should issue, a proper application of the standards to the facts of this case compels the conclusion that Bosch is entitled to the injunction it seeks. It is in ignoring these standards, and supplanting them with its own, that the district court abused its discretion.

Slip Op. at 12.  Under this precedent, the court identifies two related legal errors and an error of judgment; taking the all the factors together, the majority concludes, compels the entry of a permanent injunction. The legal errors consisted of the district court's conclusions that the presence of additional competitors in the market, without more, cuts against a finding of irreparable harm, as did the non-core nature of Bosch's wiper blade business in relation to its business as a whole.  "Injuries that affect a “non-core” aspect of a patentee’s business are equally capable of being irreparable as ones that affect more significant operations."  Slip Op. at 16.  Ultimately, the trial court's error "arises from its conclusion that, if a fact supports the granting of an injunction, its absence likely compels the denial of one.  That is not the law, however."  Slip Op. at 17. 

Dissenting in part, Judge Bryson disagreed with the majority's decision to remand with instructions to enter an injunction.  While Judge Bryson would not have affirmed the denial of an injunction, nor would he have expressly reversed, instead preferring to remand the matter back to the district court for further findings of fact and a reweighing of the equities.  

Spectralytics v. Cordis: The Jury Black Box; Teaching Away; Commercial Success; and Treble Damages

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Spectralytics v. Cordis (Fed. Cir. 2011)

In a post-verdict opinion, the district court wrote that “if this case had been tried to the Court, the Court likely would have found the ‘277 patent invalid [as Obvious].” However, the lower court refused to substitute its view of the evidence for that of the jury. On appeal, the Federal Circuit affirmed and in the process rejected Justice Breyer’s recent call for special jury verdict forms that separate the factual underpinnings of obviousness from the ultimate legal conclusion.

Obviousness: Here, the jury form simply asked “Did Cordis and Norman Noble prove by clear and convincing evidence that claim 1 of U.S. Patent No. 5,852,277 is invalid for obviousness?” and the jury checked “No.”

The black box of jury decision making is difficult to overturn on appeal because the Federal Circuit upholds jury verdicts unless there is no way that the jury’s conclusion could have been drawn from evidence presented at trial. As the Federal Circuit wrote: “for Cordis to prevail it must establish that the jury’s actual or inferred factual findings were not supported by substantial evidence, or that the evidence was not sufficient to support the findings and conclusions necessarily drawn by the jury on the way to its verdict.” In the recent Microsoft v. i4i decision, Justice Breyer wrote in concurrence that district courts should take steps to help juries separate their factual conclusions from the legal conclusions “by using instructions based on case-specific circumstances that help the jury make the distinction or by using interrogatories and special verdicts to make clear which specific factual findings underlie the jury’s conclusions.” In this case, however, the appellate court agreed that the jury had received proper instruction and the defendant did not challenge the appropriateness of the jury verdict form.

Teaching Away: An obviousness conclusion is less likely when the prior art “teaches away” from the claimed invention. In an interesting aspect of the decision, the appellate panel found that teaching-away does not require words per se, but rather the prior art design itself can teach away from an innovation. Here, the patent at issue involved a laser-cutting device for manufacturing medical stents. The prior art “Swiss-style” devices included a vibration damper to improve cutting accuracy. The claimed invention, however, “embraced” vibration in the entire device and instead improved accuracy by rigidly connecting the work-piece to the laser. The court wrote: “the jury could find, based on the expert testimony, that prior Swiss-style machines taught away from embracing vibrations to improve cutting accuracy because all prior machines improved accuracy by dampening vibrations.”

Commercial Success: Patent law allows a patentee (or patent applicant) to present “secondary indicia” of non-obviousness when attempting to overcome arguments against patentability. Here, Spectralytics argued that the commercial success of the defendants infringing products served as evidence that the invention was non-obviousness. The secondary indicia argument rests on an assumption that any obvious advances would have already been identified and accepted by the industry and thus would not lead to any particularized commercial success. Commercial success is most often disregarded by courts because patentees are unable to prove a close nexus between the patented invention being asserted in litigation and a product’s commercial success. Rather, the commercial success could be due to many other factors that might not be related to the patented invention such as marketing, high quality workmanship, technical advances other than those claimed in the patent-in-question, or low prices. Here, however, the court allowed the nexus to be proven based largely upon the defendant’s advertising:

Spectralytics points to the evidence that Norman Noble stated that its new machine was the reason why its product was better than then-competing products, and that Cordis described the new Noble machine as “superior” and “advanced technology,” with “cutting capabilities and precision not attainable” by the prior laser-cutting system. There was substantial evidence whereby a reasonable jury could have found copying and commercial success, and could have weighed these factors in favor of nonobviousness.

Damages: The jury also awarded a 5% royalty for the infringement. The defendants argued that the royalty was clearly too high because it would result in damages that were well above what its costs would have been to use a non-infringing mechanism at the time that the infringement began. The court accepted that argument in theory, but rejected it on the evidence. Holding that, based upon the evidence, the jury could have rejected the defendant’s argument that the alternatives were both available and acceptable. The appellate panel’s affirmance of the damage award may serve as an important counterbalance to recent Federal Circuit cases that demanded more specificity and analytics in damage calculations.

Willful Infringement: The jury also found the patent willfully infringed, but the district court refused to award enhanced damages or attorney fees to the patentee. On appeal, the Federal Circuit vacated that holding and remanded for a new determination as to whether the Read factors support enhanced damages. Quoting its i4i decision, the court wrote: “Although a finding of willfulness is a prerequisite for enhancing damages under § 284, the standard for deciding whether – and by how much – to enhance damages is set forth in Read, not Seagate.” Much like in a criminal sentencing hearing, the appellate court here wrote that the decision on whether to enhance damages after a finding of willful infringement may be based on a wider set of evidence than can the underlying decision of whether the infringement was willful. In particular, the court found that it when deciding whether to award enhanced damages, it is “inappropriate to discount evidence relating to whether there was adequate investigation of adverse patent rights. That is only one of the Read factors, but Seagate did not hold that it should be ignored.”

FTC Report Gives NPEs a new name (PAE), Recommends That Courts and the PTO improve Patent Notice and Damages

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This is a guest post by Professor Colleen Chien of Santa Clara University School of Law. The FTC relied heavily on Professor Chien’s empirical work for several aspects of its report.

While most of the focus right now is on Congress, the Federal Trade Commission (FTC) has recently weighed in on the patent system through its publication of “The Evolving IP Marketplace.“ Though readers of the entire 302-page report may be limited in number, if the past is any indication of the future, they are likely to be well-placed. The report’s 2003 prequel, “To Promote Innovation” has been cited by the Supreme Court (in Ebay), the Solicitor General (in the US brief in KSR), and in Congress, and by lower courts, amicus briefs, and observers of the patent system. That report was a landmark, underscoring the need to strike a balance between competition and innovation, and drawing attention to the problem of “questionable patents.” A number of its recommendations, in some form, have been adopted (elevation of the wilfulness standard, changing the obviousness standard) or are under consideration (post-grant opposition, modifying the presumption of validity). As with the 2003 report, this report bases its findings on hours of public testimony, provided over nine days of hearings and a workshop, by many members of the patent community.

The impetus for the current report has been changes in the patent marketplace, through which inventions may be transferred prior to the invention’s commercialization, ex ante, or licensed after the technology has been put into practice, ex post. The report notes that of these, ex ante transfers are increasingly important as more and more innovation comes from small and younger firms. In 1981, 70% of US R&D came from large companies (25K+ employees), and only 4.4% from companies with less than 1,000 employees; in 2005, the proportions were 37.6% and 24.1%, respectively. (p.36-7). The report is less sanguine about ex post transactions, which it criticizes for distorting competition in high-tech industries and deterring certain kinds of innovation. In noting that such transactions are increasing, the report gives certain kinds of NPEs – those focused on buying and asserting patents, rather than developing and transferring them – a new name: patent assertion entity (or “PAE”). (Side note: I have used this term in my own work, and agree with others that the relationship between PAEs and practicing entities is complex: as I describe, like PAEs, practicing entities also buy and sell into the marketplace, sue in areas in which they don’t operate, and in some cases, may stealthily partner with PAEs in their activities).

To improve the efficiency of the patent system vis a vis both ex ante and ex post transactions, the report says, patent notice and patent remedies both need to be addressed. What’s notable is not only what the report recommends, but, as described below, who the report says should implement its recommendations.

Multi-Dimensional Patent Notice Problem. The report describes the problem of a lack of patent notice, particularly in high-tech industries, with reference to many aspects of the patent system. Companies can’t clear their rights at the product planning stage because they can’t sift through a multitude of patents. Even when particular patents are identified, their boundaries are unclear, and can also change a lot between publication and issue. You can’t necessarily tell who owns a patent because patentees don’t have to record their transfers. To cure these problems, the report recommends, for example, bolstering enforcement of 112 para. 1 and requiring recording of transactions as well as identification of the real parties in interest to a transaction.

Replicating the Market Reward. The FTC adds its voice to the chorus of those who believe that remedies law, in particular damages law, needs repair, but also articulates the principles and theory it believes should guide change. Patent remedies should reflect the economic value of inventions, and replicate the reward provided by the marketplace. The report provides a point by point analysis of the factors that district courts and the ITC consider in awarding remedies, setting forth “an economically-grounded approach” to remedies.

Post-Ebay Injunctions: In a side analysis, the report addresses the sense that, post-Ebay, it’s much more difficult for non-practicing entities to get permanent injunctions. The report indicates that that’s not necessarily true: through March 2010, district courts granted about half of the requests for injunction they received from non-practicing entities (seven of thirteen, or a rate of 54%, as compared to a general grant rate at 72-77%) (p.217). The successful requests tended to come from universities and research and development organizations (p.262-4), however, who arguably don’t fit the definition of “PAE.”

Recommendations – Differentiated Roles for the PTO, courts, Congress, and the Public: What the FTC recommends, and who it says should implement its recommendations are both worth noting. Congress’ list of to-do’s, for example (shoring up PTO funding and requiring recordation of assignments – neither of which are in the current bills), is notably short. The bulk of the work has instead been assigned to courts, which, as Dennis detailed before Congress have taken the laboring oar in reforming patent law. The FTC tasks district courts and the Federal Circuit with fixing damages law, carefully considering injunctions, and enforcing 35 USC 112 para. 1. Many suggestions are also aimed at the PTO, who the report says should work alone or together with the public to, for example, foster uniformity in software inventions, put examiner interviews on the record, and press applicants for improved disclosure. As the Federal Circuit’s Uniloc decision, and the PTO’s recently introduced supplementary 112 guidelines show, their work is well underway.

Colleen Chien, Assistant Professor at Santa Clara University Law School

Patent Damages and the Need for Reform

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This is a guest Post by Michael J. Mazzeo, Jonathan Hillel and Samantha Zyontz[1]

Our analysis of a new dataset challenges the assumptions on which the Patent Reform Act is based and questions the need for damages law reform. Damages provisions of the Patent Reform Act, the latest version of which was recently introduced for vote in the Senate, are premised on concerns that awards are “too often excessive”[2] and those large verdicts featured in media headlines “represent the tip of the iceberg” of excessive awards.[3] Last week at the inaugural Samsung-Stanford Patent Remedies Conference, we presented a very different picture of patent infringement damages.

In our prize-winning study, “Are Patent Infringement Awards Excessive?: The Data Behind The Patent Reform Debate”, we compile a dataset comprising infringement awards from over 300 cases decided in US federal courts between 1995 and 2008. We build on a proprietary dataset from PricewaterhouseCoopers, supplementing it with information about the litigants, lawsuits and economic value of the patents-at-issue. Using standard statistical techniques and regression analysis, we search for evidence of “excessive” awards. Certain of our key findings are summarized below:

1. The eight largest awards represent nearly half of the total amount of damages in our dataset. As shown below, the distribution of damages is highly skewed, and awards in the largest eight cases represent over 47% of cumulative damages.

Mazzeo1

2. Patent infringement damages are highly predictable. We perform an 80-variable log-linear regression analysis that explains nearly 75% of the variation in the observed awards. As shown below, the first-order results of our regression indicate that juries and large defendants are correlated with higher awards.

(more…)

Guest Post: Update To Recent Patent Damages Article

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Guest Post By Michael J. Kasdan and Joseph Casino

In our March 3, 2010 article in the Patently-O Law Journal, Federal Courts Closely Scrutinizing and Slashing Damages Awards, we discussed recent shifts in the Federal Circuit’s reasonable royalty jurisprudence and concluded that the recent Cornell, Lucent, and Lansa cases “indicate an emerging trend to more carefully scrutinize the evidentiary and economic basis of reasonable royalty-based patent damages awards in the setting of the appropriate royalty base, the application of the entire market value rule, and the calculation of the appropriate royalty rate.” We also noted that contemplated legislative reforms in the area of patent damages may likewise “seek to put the burden on district court judges to act as ‘gatekeepers’ and to closely scrutinize the evidence that is relied upon to prove patent damages.”

1. Patent Reform Bill

Shortly after our article was published, the U.S. Senate announced a new “compromise” patent reform bill (full text available here), which includes a section addressing patent damages. Whereas prior versions of the patent reform bill which had been considered over the past years had contemplated introducing more specific statutory limitations on patent damages,[1] the current Senate compromise bill does not.

Rather, the approach taken in the current compromise bill is to statutorily emphasize the district court’s “gatekeeper” role over damages theories and evidence. While there is nothing new about district court judges acting as gatekeepers by conducting so-called Daubert hearings to determine whether to exclude expert testimony under Federal Rule of Evidence 702, including on damages-related issues, the proposed bill essentially makes conducting a thorough Daubert hearing on patent damages mandatory. In the section entitled “Procedure For Determining Damages,” it requires that “[t]he court shall identify the methodologies and factors that are relevant to the determination of damages, and the court or jury, shall consider only those methodologies and factors relevant to making such a determination.” In addition, in a section entitled “Sufficiency of Evidence,” it requires that “the court shall consider whether one or more of a party’s damages contentions lacks a legally sufficient evidentiary basis” and that “[t]he court shall only permit the introduction of evidence relating to the determination of damages that is relevant to the methodologies and factors that the court determines may be considered in making the damages determination.” We expect that this proposed reform bill will not alter the traditional role of the Georgia-Pacific factors, which have been used in the reasonable royalty analysis, or other established damages law. Thus, other than providing for a first review of the damages evidence by the judge before a case is sent to a jury, it is unclear whether the Senate’s proposal would have the effect of limiting damages. The substantive impact will greatly depend on how strict individual judges are when they conduct their Daubert hearings; and this will likely vary from judge to judge. But the recent Federal Circuit case law discussed in our prior article, as well as the additional case discussed below, does signal that the Federal Circuit is providing strong guidance as to the degree of scrutiny of the damages theories and evidence that district courts should undertake.

2. The IP Innovations Case

As many of our readers pointed out, Federal Circuit Judge Rader, who sat by designation in the Cornell case, also recently sat by designation in IP Innovation, LLC v. Red Hat, Inc. et al., Case No. 2:07-cv-447. (Based on his track record in the Cornell case, we are sure that plaintiff was none too pleased that Judge Rader was sitting by designation in their case, at least with regard to damages). In his March 2, 2010 ruling on post-trial motions in IP Innovation, Judge Rader again took the opportunity to illustrate his view of the type of careful scrutiny that district court judges should be giving to damages theories and evidence. The court excluded the testimony of plaintiff’s damages expert, because his damages theory on what would be a reasonable royalty, “improperly inflates both the royalty base and the royalty rate by relying on irrelevant or unreliable evidence and by failing to account for the economic realities of this claimed component as part of a larger system.” Slip. op. at 6.

In IP Innovation, the patents-in-suit related to particular features of the defendants’ Linux operating system software, specifically, the “multiple virtual workspaces and workspace switching features.” Plaintiffs’ expert had propounded a damages theory under the “entire market value rule,” in which he sought damages based on defendants’ total sales of the entire operating system software. Judge Rader excluded this testimony because the damages methodology did not “show a sound economic connection between the claimed invention and this broad proffered royalty base.” Id. at 3. Judge Rader first found that “the claimed invention is but one relatively small component of the accused operating systems” particularly in view of “the relative importance of other features such as security, interoperability, and virtualization.” Id. In addition, the court noted that there was no evidence in the record supported the notion that the claimed feature drove demand – “users do not buy the accused operating systems for their workspace switching feature.” Id. Indeed, plaintiffs’ expert did not make any effort “to even discern the percentage of users” who even used the feature. Id. at 4. Accordingly, the court found that “the record cannot support the unfounded conclusion that the often-unused feature drives demand for a royalty base of 100% of the operating systems as a whole.” Id. As in his decision in the Cornell case, it appears that in order to proceed under an entire market value rule theory, Judge Rader would require that the plaintiff provide specific evidence tying customer demand to the claimed feature, or a survey that addresses whether and to what degree the claimed feature drives demand.

In excluding the damages testimony, Judge Rader also rejected plaintiff’s argument that it was difficult to determine the value of the desktop switching feature relative to other features of the products based on the information produced in discovery and that the desktop switching feature “has no separate valuation, no aftermarket, and thus no way to value the accused feature separately.” The court found that the burden of proof lay with plaintiff and not with defendant: “IPI must show some plausible economic connection between the invented feature and the accused operating systems before using the market value of the entire product as the royalty base.” Id. at 4.

Finally, Judge Rader also addressed the evidentiary value of other license agreements. The court faulted plaintiffs’ expert for disregarding license agreements from years prior to the hypothetical negotiation date in favor of general industry data that was not at all linked to the specific technology of the patents-in-suit. The court found that “these [older specific] licenses are far more relevant than the general market studies” that plaintiff’s expert selected to rely upon.

Judge Rader’s recent active gate-keeping decisions, such as Cornell and now IP Innovation, as well as the Federal Circuit’s recent pronouncements in Lucent and Lansa, are even more significant and instructive when viewed in the context of the currently pending patent reform legislation, which specifically proposes addressing the issue of patent damages by having the courts act as stricter gate-keepers on damages theories and evidence.

[1]   For example, the 2007 Patent Reform Bill proposed limiting the amount of damages recovered as a reasonably royalty based on an attribution of “the economic value properly attributable to the patent’s specific contribution over the prior art” and statutorily limits the application of the “entire market value rule” to circumstances where the patentee has established that that the claimed feature is “the predominant basis for market demand” of an entire product.

Damages: Federal Circuit Again Demands More Substance from Damages Experts

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PatentLawPic923ResQNet.com and Jeffrey Kaplan v. Lansa, Inc. (Fed. Cir. 2010)

The district court held that one of ResQNet’s patents was infringed and awarded $500k in past damages based on a 12.5% royalty rate. The court denied the patentee’s requested permanent injunction but instead ordered an ongoing license at the 12.5% royalty rate. The court also awarded sanctions against ResQNet’s counsel for failing to withdraw patents from suit that were clearly not infringed.

On appeal, the Federal Circuit took issue with the damages calculation — holding that the lower court had “relied on speculative and unreliable evidence divorced from proof of economic harm linked to the claimed invention.” 

This appellate decision should be seen as an extension of the Federal Circuit’s 2009 Lucent v. Gateway decision.  The issue of sufficiency of expert testimony on damages has been brewing for some time. I remember sitting near Judge Rader (one of the authors of this opinion) and both of us listening to Northern District of California Judge Ron Whyte refer to economic damages experts as the “most intellectually dishonest witnesses” that testify in his court.

Hypothesize Rather than Speculate: The statutory minimum damages for patent infringement is a “reasonable royalty.” That calculation typically involves a “hypothetical negotiation” in an attempt to calculate the rate at which the patentee would have licensed the patent to the infringer prior to the infringement.  Although the hypothetical negotiation is always involves guesswork, here the Federal Circuit reiterated the koan that the guesses must be based on evidence: “a reasonable royalty analysis requires a court to hypothesize, not to speculate.” Everyone understands that the arguments must have some evidentiary basis. Here, the real question was the type of evidence that can be applicable.  In particular, the appellate court held that the only relevant evidence is evidence related to “compensation for the economic harm caused by infringement of the claimed invention.”

Past Royalty Rate Must be Tied to Invention: The first problem with ResQNet’s evidence was that it presented past ResQNet license rates that were not bare patent licenses.  Addressing a similar issue, the CAFC wrote in its 2009 Lucent decision that a reasonable royalty damage award “cannot stand solely on evidence which amounts to little more than a recitation of royalty numbers, one of which is arguably in the ball-park of the jury’s award, particularly when it is doubtful that the technology of those license agreements is in any way similar to the technology being litigated here.”  Lucent.  According to the appellate panel, ResQNet’s expert witness Dr. Jesse David “used licenses with no relationship to the claimed invention to drive the royalty rate up to unjustified double-digit levels.”  The court indicated that experts need even more credible justification when the proposed royalty rate is much higher than might be expected.

Although the discredited prior licenses used by Dr. David were ResQNet licenses, those licenses were directed to the software code and re-branding rights but apparently did not specifically mention the patent number in suit and the evidence did not tie the licenses directly to the claimed invention. The appellate panel rejected these licenses as irrelevant to estimating royalty rate for the infringed patent: “In simple terms, the ’075 patent deals with a method of communicating between host computers and remote terminals—not training, marketing, and customer support services. The re-bundling licenses simply have no place in this case.”

The defendant Lansa did not offer any expert testimony on damages to counter Dr. David.  However, that failure does not remove the patentee’s burden to properly prove its damages. “As a matter of simple procedure, Lansa had no obligation to rebut until ResQNet met its burden with reliable and sufficient evidence.”

Judge Newman writing in dissent argued that the appellate panel over-stepped its bounds:

This is not a case of constructing, and applying, a royalty rate from totally unrelated content; it is simply a case of determining the evidentiary value of the infringed subject matter by looking at the various licenses involving that subject matter, and allocating their proportional value, with the assistance of undisputed expert testimony.

In the district court, ResQNet’s damages expert Dr. David, a qualified economist with experience in the field, followed the traditional application of the Georgia-Pacific factors, analyzing the impact of all of these factors in an extensive Expert Report and in testimony at trial. He was subject to examination and cross-examination in the district court, and the district court provided a full and reasoned analysis of the evidence. No flaw in this reasoning has been assigned by my colleagues, who, instead, create a new rule whereby no licenses involving the patented technology can be considered, in determining the value of the infringement, if the patents themselves are not directly licensed or if the licenses include subject matter in addition to that which was infringed by the defendant here. In this case, the added subject matter was usually the software code that implements the patented method, as the district court recognized, and whose contribution to the value of the license was evaluated by the damages expert and discussed by the court. My colleagues’ ruling today that none of that information is relevant to the assessment of damages is unprecedented, and incorrect.

Judge Newman was a member of the Lucent panel and argues that the majority decision here is “distorting the principles” of that case.

Ongoing damages: The appellate panel did not consider the issue of ongoing damages (compulsory license) because that question was not appealed.

Sanctions: The appellate panel did reverse the imposition of sanctions on Jeffrey Kaplan’s firm. In its decision, the court noted (i) the untimeliness of the motion for sanctions; (2) Kaplan’s prompt withdrawal of one of the three patents-in-suit; and (3) the actual “litigation substance” concerning the patent that was only withdrawn at the last minute.

False Marking: Calculating Damages Part I

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The Forest Group, Inc. v. Bon Tool Co. (Fed. Cir. 2009).

The false marking statute provides for a fine of “not more than $500 for every … offense.” 35 U.S.C. 292. Past cases have severely limited the false-marking damage award by holding that the sale of thousands of falsely marked items constituted a single “offense” under the statute. The Federal Circuit has rejected those cases – holding here that a qui tam plaintiff may collect up to $500 for each falsely-marked product distributed. This decision is important because it opens the door to potentially large monetary judgments in false-marking cases. Anyone who marks their products as patented or patent pending should take this opportunity to review those markings to ensure that the product being marked falls within the scope of the listed patent and that the patent continues to be valid and enforceable.

At one time Bon Tool bought & sold construction stilts that were manufactured by Forest. However, Bon Tool eventually dropped Forest as a supplier and began importing a duplicate knock-off version from China even though Forest’s stilts were marked with its Patent No. 5,645,515. Forest sued for infringement. During litigation, the district court construed the claims in a way that made clear that neither the original Forest stilts nor the knockoff stilts infringed the patent. At that point (in 2007), Forest’s claims were dismissed on summary judgment. For the next two years, however, the parties argued Bon Tool’s counter claims – including false-marking. In 2009, the district court held that Forest was liable for false-marking because it continued to mark its products as patented even after the 2007 summary judgment decision. However, the court awarded only $500 in damages.

Parties have a reason to mark their products as patented because such marking serves as constructive notice to potential infringers—allowing a patentee to collect damages for past infringement. Under Section 287 of the Patent Act, “[i]n the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice.” In theory, marking a product as patented will deter others from attempting to compete by creating a similar version of the product. In addition, manufacturers may garner some reputational benefit by indicated that their product is patented or that a patent is pending.

The false-marking statute is intended to promote competition as a counterbalance against scams and potentially overreaching claims. A successful false-marking claimant must prove two elements: first, that an unpatented article has been marked as patented; and second that the marking was done with intent to deceive the public. See Clontech Labs. Inc. v. Invitrogen Corp., 406 F.3d 1347, 1352 (Fed. Cir. 2005). Here, the Federal Circuit reviewed the district court bench-trial finding of false-marking for clear error. It found no clear error. The appellate panel did, however, hold that the district court had improperly limited the damage award to $500.

Under Section 292 of the Patent Act anyone who marks an “unpatented article with the word ‘patent’ … for the purpose of deceiving the public … shall be fined not more than $500 for every such offense.” Although the false-marking statute has been part of the patent law for more than 150 years, it was amended in 1952. That amendment changed the damage calculation from “not less than one hundred dollars” to “not more than $500.” The leading case interpreting the pre-1952 statute is the one hundred year old decision of London v. Everett H. Dunbar Corp., 179 F. 506 (1st Cir. 1910). In London, the court interpreted the statute to impose “a single fine for continuous false marking”—reasoning that a minimum penalty of $100 per falsely marked article would be out of proportion and inequitable.

[I]f we construe the statute to make each distinct article the unit for imposing the penalty, the result may follow that the false marking of small or cheap articles in great quantities will result in the accumulation of an enormous sum of penalties, entirely out of proportion to the value of the articles. . .

Despite the statutory change, recent courts have followed the London precedent – including the Bon Tool district court. On appeal, the Federal Circuit rejected that precedent – holding instead that the statute requires that each falsely marked article can serve as the basis of a separate offense. The appellate court made clear that the reasoning of London no longer applies because the statute now sets a maximum per-offense award rather than a minimum.

This does not mean that a court must fine those guilty of false marking $500 per article marked. The statute provides a fine of “not more than $500 for every such offense.” By allowing a range of penalties, the statute provides district courts the discretion to strike a balance between encouraging enforcement of an important public policy and imposing disproportionately large penalties for small, inexpensive items produced in large quantities. In the case of inexpensive mass-produced articles, a court has the discretion to determine that a fraction of a penny per article is a proper penalty.

Vacated. On remand, the district court must “determine the number of articles falsely marked by Forest after November 15, 2007 [and] the amount of penalty to be assessed per article.”

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Using Reexaminations to Avoid Willfulness Damages

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Most patents currently being reexamined at the PTO are also being litigated in parallel proceedings in district court. This rise in importance of parallel reexaminations leads directly to both Constitutional controversies and practical problems. Although the Federal Circuit has nimbly attempted to avoid the problem, the truth is that both the PTO (an Article II executive agency) and the Article III Courts focus on the same question of validity of patent claims. These races to conclusion raise questions of both separation of powers and res judicata.

A practical issue is raised by Microsoft in the i4i case relates to the relevance of non-dispositive reexamination events to the question of willful infringement. In Microsoft’s case, the ex parte reexamination request was initially granted, and that grant was followed by a non-final office action rejection. On appeal, Microsoft argued that the PTO’s rejections of i4i’s claims on obviousness grounds should result in a per se finding that its its infringement defenses were not objectively reckless. Rather, according to Microsoft, the PTO’s grant of reexamination and non-final rejection at least serve to prove that its defenses were credible. i4i argues on the other side that the non-dispositive reexamination events are irrelevant because of the different standard for review, different claim construction approach, and lack of finality.

At the Santa Clara Law School conference that I attended yesterday, one panelist made a seeming reasonable suggestion – that courts should begin to reexamination results once an applicant agrees to amend or cancel claims being asserted during litigation. At that point, it is a foregone conclusion that the resulting reexamination certificate will not confirm the patentability of those pre-amended claims.

Lucent v. Microsoft: Damages

Damages, Patent, , , , ,

Lucent v. Gateway & Microsoft (Fed. Cir. 2009)

Lucent’s patent-in-suit claims was filed in 1986 and generally focuses on using an on-screen keyboard to enter information into a computer. In 2002, Lucent sued Microsoft and others for infringement. Since then, the patent has expired, but the litigation continues over past damages. Perhaps most notably, this case may serve as a reminder that a twenty year patent term represents a major span in the worlds of business and technology.

The primary infringing portion of Microsoft’s software appears to be the “date picker” function found in Microsoft calendars. In litigation, the jury sided with Lucent and awarded the patent holder with $350 million in damages. Here, I discuss three aspects of the opinion: damages; obviousness; and inducement.

Damages: Most of the action in the Federal Circuit decision revolves around damages. The parties appear to agree that Microsoft sold 110 million accused units with a total sales value of $8 billion. Based on that figure, Lucent requested $561 million in damages based on an 8% royalty rate of Microsoft’s sales revenue. Microsoft argued that the correct licensing rate should result in only $6 million lump sum in damages. On appeal, the Federal Circuit vacated the $350 million dollar award and remanded for a new trial solely on the issue of damages – finding that the original verdict was not supported by substantial evidence.

Reasonable Royalty Calculation: The Patent Act requires that a court award damages at least in the amount of a “reasonable royalty.” The hallmark of that calculation involves a hindsight reconstruction in an attempt to calculate the patentee’s differential “pecuniary condition . . . if the infringement had not occurred.” This is often done through a “hypothetical negotiation” reconstruction based on the Georgia-Pacific factors. See Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970); see also Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554 n.13 (Fed. Cir. 1995) (en banc).

Entire Market Value: When a patentee proves that the patent related feature serves as the predominant basis for customer demand, courts allow damages to be based upon the “entire market value” of the product (i.e., 8% of the sales revenue of Microsoft Office) rather than focusing on the incremental value of the innovation. Here, the Federal Circuit held that the “only reasonable conclusion” is that the date-picker function is not a substantial driver of Office sales. “There was no evidence that anybody anywhere at any time ever bought Outlook . . . because it had a date picker.”

Patentees typically prefer to invoke the entire market value rule because it seemingly tends to lead to higher total damage payouts. Of course, the market value only sets a base. Interestingly, the Federal Circuit recognized here that the bar on using the entire market value of a product is rather arbitrary.

Although our law states certain mandatory conditions for applying the entire market value rule, courts must nevertheless be cognizant of a fundamental relationship between the entire market value rule and the calculation of a running royalty damages award. Simply put, the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence). . . . Microsoft surely would have little reason to complain about the supposed application of the entire market value rule had the jury applied a royalty rate of 0.1% (instead of 8%) to the market price of the infringing programs. Such a rate would have likely yielded a damages award of less than Microsoft’s proposed $6.5 million.

The Court goes on to suggest that the entire market value rule has a place in cases where the invention is only a small portion of the product.

Some commentators suggest that the entire market value rule should have little role in reasonable royalty law. See, e.g., Mark A. Lemley, Distinguishing Lost Profits From Reasonable Royalties, 51 Wm. & Mary L. Rev. (forthcoming 2009) … Amy Landers, Let the Games Begin: Incentives to Innovation in the New Economy of Intellectual Property Law, 46 Santa Clara L. Rev. 307, 362 (2006) … But such general propositions ignore the realities of patent licensing and the flexibility needed in transferring intellectual property rights. The evidence of record in the present dispute illustrates the importance the entire market value may have in reasonable royalty cases.

Georgia Pacific Factors: In its opinion, the Federal Circuit emphasized the flexibility of its jurisprudence in deciding damages with an understanding that actual licensing (much less a hypothetical negotiation) is “complicated” and “inexact.” Ultimately, the case is being sent back for a new trial because the jury’s award was not logically tied to the evidence. (“[T] damages evidence of record was neither very powerful, nor presented very well by either party.”) Most notably lacking are comparable licensing agreements.

First, some of the license agreements are radically different from the hypothetical agreement under consideration for the Day patent. Second, with the other agreements, we are simply unable to ascertain from the evidence presented the subject matter of the agreements, and we therefore cannot understand how the jury could have adequately evaluated the probative value of those agreements.

Damages award vacated

Power Behind the Black Box of Obviousness: In a string of recent cases, the Federal Circuit has reinvigorated the notion that jury verdicts on the question of obviousness will likely be upheld on appeal. Here, Microsoft argued for a particular interpretation of the prior art that it presented. While being sympathetic to Microsoft’s argument, the court held that the defendant’s arguments did not meet the necessary burden.

When the underlying facts are taken in the light most favorable to Lucent, the non-moving party, the evidence reasonably permitted the jury to have decided that Microsoft did not prove by clear and convincing evidence that claim 19 would have been obvious.

Nonobviousness affirmed.

Inducement: Lucent’s case was built on the notion of contributory infringement. Microsoft’s software does not – just by itself – directly infringe Lucent’s asserted method claims. Rather, by selling the software, Microsoft leads its customers to directly infringe. Contributory infringement and inducement both require proof of underlying direct infringement. At trial, Lucent was unable to point to any actual instance where a Microsoft customer used Microsoft products to perform the claimed method. On appeal, the Federal Circuit affirmed the infringement finding by holding that circumstantial evidence was sufficient to support a conclusion that at least one person (other than the experts in the case) used the products in an infringing manner.

As in Moleculon, the jury in the present case could have reasonably concluded that, sometime during the relevant period from 2003 to 2006, more likely than not one person somewhere in the United States had performed the claimed method using the Microsoft products.

Infringement affirmed.

Bits and Bytes No. 117: Data, Damages & Deferred Examination

Bits and Bytes
  • Data.Gov: As part of the transparent government project, we now have the website Data.Gov with the purpose of “increas[ing]public access to high value, machine readable datasets generated by the Executive Branch of the Federal Government.” So far, the PTO has only included two datasets -both of which were already available through the PTO website. Hopefully there will be more to come – including opening access to PAIR. [More here].
  • IP Colloquium: Professor Lichtman has released a new edition of his audio-program IP Colloquium. This month’s program focuses on reforms of the patent damages laws. [LINK] The program offers CLE Credit.
  • Deferred Examination: Comments on a potential deferred examination program are here.
  • Deferred Examination: Intel’s comments are interesting. The company argues that the success of deferred examination in other countries is a facade. Rather, the high rate of drop-out during prosecution in countries such as Japan, Germany, and Korea is due to the inventor compensation schemes in those countries. So the story goes – companies in those countries tend to file more low-quality local patent applications for the purpose preempting inventors from asserting rights on their own.

“We actually believe that the reason that deferred examination has had little success in the United States is due to the inventor compensation schemes that exist in many countries such as Japan, Germany and Korea.

In essence, under the regimes in these countries, if the company fails to patent the invention, the inventor has the right to file on his or her own behalf. Having inventors file on their own behalf is generally viewed as undesirable. As a result, the companies file disproportionately more applications in their home jurisdictions than normal prudence would otherwise suggest. Since they are filing these in part to pre-empt the inventor’s rights and to avoid having additional inventor compensation issues, we believe that this contributes to an inclination to avoid paying the examination fee and then to abandon the patent application.   

However, outside their home jurisdictions, these companies have a tendency to file a fraction of the patents that they file in their home jurisdictions. Having filed in the home jurisdiction, they have little or no concern that the inventor has the right or will file the application overseas. Apparently, as a result, they do not appear to abandon nearly as high a percentage of the patent applications that they file outside their home jurisdictions as they file in their home jurisdictions.

Of course, the US does not have such inventor compensation statutes. Those foreign companies that file and abandon so heavily in their home jurisdictions exhibit radically different behavior in the US. They file less and abandon much less. Hence, we believe that this helps explain the disparate experience of deferred examination in other countries. It means that the practice in these other countries is not likely to be a good indicator for practice before the USPTO.”

Bits and Bytes No. 117: Data, Damages & Deferred Examination

Bits and Bytes, Patent
  • Data.Gov: As part of the transparent government project, we now have the website Data.Gov with the purpose of “increas[ing]public access to high value, machine readable datasets generated by the Executive Branch of the Federal Government.” So far, the PTO has only included two datasets -both of which were already available through the PTO website. Hopefully there will be more to come – including opening access to PAIR. [More here].
  • IP Colloquium: Professor Lichtman has released a new edition of his audio-program IP Colloquium. This month’s program focuses on reforms of the patent damages laws. [LINK] The program offers CLE Credit.
  • Deferred Examination: Comments on a potential deferred examination program are here.
  • Deferred Examination: Intel’s comments are interesting. The company argues that the success of deferred examination in other countries is a facade. Rather, the high rate of drop-out during prosecution in countries such as Japan, Germany, and Korea is due to the inventor compensation schemes in those countries. So the story goes – companies in those countries tend to file more low-quality local patent applications for the purpose preempting inventors from asserting rights on their own.

“We actually believe that the reason that deferred examination has had little success in the United States is due to the inventor compensation schemes that exist in many countries such as Japan, Germany and Korea.

In essence, under the regimes in these countries, if the company fails to patent the invention, the inventor has the right to file on his or her own behalf. Having inventors file on their own behalf is generally viewed as undesirable. As a result, the companies file disproportionately more applications in their home jurisdictions than normal prudence would otherwise suggest. Since they are filing these in part to pre-empt the inventor’s rights and to avoid having additional inventor compensation issues, we believe that this contributes to an inclination to avoid paying the examination fee and then to abandon the patent application.   

However, outside their home jurisdictions, these companies have a tendency to file a fraction of the patents that they file in their home jurisdictions. Having filed in the home jurisdiction, they have little or no concern that the inventor has the right or will file the application overseas. Apparently, as a result, they do not appear to abandon nearly as high a percentage of the patent applications that they file outside their home jurisdictions as they file in their home jurisdictions.

Of course, the US does not have such inventor compensation statutes. Those foreign companies that file and abandon so heavily in their home jurisdictions exhibit radically different behavior in the US. They file less and abandon much less. Hence, we believe that this helps explain the disparate experience of deferred examination in other countries. It means that the practice in these other countries is not likely to be a good indicator for practice before the USPTO.”

Bits and Bytes No. 117: Data, Damages & Deferred Examination

Bits and Bytes, Patent
  • Data.Gov: As part of the transparent government project, we now have the website Data.Gov with the purpose of “increas[ing]public access to high value, machine readable datasets generated by the Executive Branch of the Federal Government.” So far, the PTO has only included two datasets -both of which were already available through the PTO website. Hopefully there will be more to come – including opening access to PAIR. [More here].
  • IP Colloquium: Professor Lichtman has released a new edition of his audio-program IP Colloquium. This month’s program focuses on reforms of the patent damages laws. [LINK] The program offers CLE Credit.
  • Deferred Examination: Comments on a potential deferred examination program are here.
  • Deferred Examination: Intel’s comments are interesting. The company argues that the success of deferred examination in other countries is a facade. Rather, the high rate of drop-out during prosecution in countries such as Japan, Germany, and Korea is due to the inventor compensation schemes in those countries. So the story goes – companies in those countries tend to file more low-quality local patent applications for the purpose preempting inventors from asserting rights on their own.

“We actually believe that the reason that deferred examination has had little success in the United States is due to the inventor compensation schemes that exist in many countries such as Japan, Germany and Korea.

In essence, under the regimes in these countries, if the company fails to patent the invention, the inventor has the right to file on his or her own behalf. Having inventors file on their own behalf is generally viewed as undesirable. As a result, the companies file disproportionately more applications in their home jurisdictions than normal prudence would otherwise suggest. Since they are filing these in part to pre-empt the inventor’s rights and to avoid having additional inventor compensation issues, we believe that this contributes to an inclination to avoid paying the examination fee and then to abandon the patent application.   

However, outside their home jurisdictions, these companies have a tendency to file a fraction of the patents that they file in their home jurisdictions. Having filed in the home jurisdiction, they have little or no concern that the inventor has the right or will file the application overseas. Apparently, as a result, they do not appear to abandon nearly as high a percentage of the patent applications that they file outside their home jurisdictions as they file in their home jurisdictions.

Of course, the US does not have such inventor compensation statutes. Those foreign companies that file and abandon so heavily in their home jurisdictions exhibit radically different behavior in the US. They file less and abandon much less. Hence, we believe that this helps explain the disparate experience of deferred examination in other countries. It means that the practice in these other countries is not likely to be a good indicator for practice before the USPTO.”

Rooklidge: Patent Reform Damages Provision Violates Seventh Amendment

Academic Studies, Articles and Publications, Damages, Patent, Patent Legislation, , ,

The following post is by Bill Rooklidge. Rooklidge is a patent litigator and former head of the AIPLA. He clerked at the Federal Circuit in the early 1980’s.

Richard Cauley’s March 14, 2009 guest post accurately characterized the damages reform provision of the Patent Reform Act of 2009 as “a judicial nightmare” because of its procedural complications, attendant delay and reversal potential. Two additional problems with that provision merit note: it perpetuates prior art subtraction and introduces into jury trial multiple potential violations of the Seventh Amendment.

Fact-finding and the Seventh Amendment. The Supreme Court coined the term “gatekeeper” in Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993), to describe the trial court’s obligation to “ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable.” In addition to rulings on Daubert motions, courts also fulfill their gatekeeper role by ruling on motions for summary judgment and judgment as a matter of law, motions in limine, evidentiary objections, and jury instructions. The bills’ damages section would enhance the courts’ gatekeeper role, but in doing so unconstitutionally invade the jury’s province as fact finder.

The bills would add to 35 U.S.C. §284 paragraph (c)(1), which would require the court to select from three methods for calculating a reasonable royalty “based on the facts of the case and after adducing any further evidence the court deems necessary.” A procedural rule requiring the court to weigh evidence to select from alternate theories would be void for depriving the patentee of its right to jury trial. See Fidelity & Deposit Co. of Maryland v. United States, 187 U.S. 315, 320 (1902). A genuine issue of material fact, that is, a dispute over facts that might affect the outcome, requires the issue to go to the jury. See generally Anderson v. Liberty Lobby, 477 U.S. 242 (1986). Similarly, the trial court’s exclusion of the entire market value rule under paragraph (c)(1)(A) for the patentee’s failure to make “a showing to the satisfaction of the court,” would violate the Seventh Amendment in a jury trial in which the patentee presents enough evidence to create a genuine issue of material fact. See Minks v. Polaris Indus., Inc., 546 F.3d 1364, 1372 (Fed. Cir. 2008) (vacating because trial “court necessarily engaged in an independent review of the evidence and substituted its conclusion for that of the jury on the factual issue of compensatory damages”).

The first section of the bills’ section (c)(1)(B) authorizes trial courts to exclude the patentee’s prior licenses for failure to make a “showing to the satisfaction of the court” of three facts regarding the claimant’s other licenses:

“the claimed invention has been the subject of a nonexclusive license for the use made by the invention by the infringer”;

the licenses have been extended “to a number of persons sufficient to indicate a generally marketplace recognition of the reasonableness of the licensing terms”; and

“the license was secured prior to the filing of the case before the court.”

The court also must determine whether the infringer’s use is “of substantially the same scope, volume, and benefit of the rights granted under such license. The second sentence of paragraph (c)(1)(B) requires a similar procedure for noninfringing substitutes for the infringing product or process. And paragraph (c)(1)(C) likewise requires the court to “conduct an analysis to ensure that a reasonable royalty is applied only the portion of the economic value of the infringing product or process properly attributable to the claimed invention’s specific contribution over the prior art.” A court making these findings would invade the province of the jury where the patentee presents substantial evidence on these issues.

Prior Art Subtraction. Section (c)(1)(A)’s requirement for application of the entire market value rule that the “claimed invention’s specific contribution over the prior art” be the “predominant basis for market demand” is just the latest form of “prior art subtraction.” Use of “specific contribution over the prior art” is an attempt to separate the “gist” or “heart” of the invention from the patent claims, and would introduce the extra step of subjectively redefining the scope of a patent. The Federal Circuit long ago rejected using the “gist” or “heart” of the invention to determine obviousness, see Para-Ordnance Mfg. v. SGS Importers Int’l, Inc., 73 F.3d 1085 (Fed. Cir. 1995), and recently rejected using the “point of novelty” in design patent law. Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665, 678 (Fed. Cir. 2008). Stripping the prior art elements out of the claimed invention that has been examined by the USPTO, construed by the federal district court, and relied upon to determine validity and infringement, in no way approximates the “heart” or “gist” of the invention, and that inherently subjective process would be unfair to the patent owner, and would eliminate application of the entire market value to inventions consisting entirely of prior art elements, arguably the vast majority.

Paragraph (c)(1)(C) would limit the reasonable royalty base to the “economic value of the infringing product or process properly attributable to the claimed invention’s specific contribution over the prior art,” replacing apportionment with prior art subtraction. This analysis is no substitute for the sophisticated and nuanced apportionment approach available under existing case law such as Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1133-37 (S.D.N.Y. 1970). Paragraph (c)(1)(C) would address the combination invention problem by stating that for combination inventions “the contribution over the prior art may include the value of the additional function resulting from the combination, as well as the enhanced value, if any, of some or all of the prior art elements as part of the combination, if the patentee demonstrates that value.” This analysis, which finds no precedent in existing case law and lacks any readily definable economic standards, does not even begin to address the problem that subtracting the prior art elements simply does not approximate what the inventor really invented.

Replacement of “contribution over the prior art” with the “essential features” language from the Supreme Court’s recent Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008), would just put another label on prior art subtraction. Regardless of label, the bills’ damages provision would drastically reduce patent owners’ ability to obtain reasonable royalty damages, which could not be less fair to those, like independent inventors, research institutions and universities, that have no ability to obtain lost profits damages.

Notes

Patent Reform 2009: More on Damages

Damages, Patent, Patent Legislation, , ,

Guest Post by Richard Cauley. Cauley is the author of the recent Oxford Press book titled Winning the Patent Damages Case: A Litigator’s Guide to Economic Models and Other Damage Strategies. I asked him to provide some thoughts on the damages proposals in the Patent Reform Act of 2009. Cauley.jpg

The damages provisions of the Patent Reform Act of 2009 are not new, nor, in an economic sense, are they particularly controversial. Although their introduction in this legislation may create a political firestorm among those who wish to artificially maximize the economic leverage of patentholders both in court and across the bargaining table, the solutions proposed in the latest attempt at patent reform merely reflect – and attempt to measure – the true economic worth of a patent and the reasonable return to which an inventor is entitled.

What these damages provisions (all of which were contained in the various versions of the failed Patent Reform Act of 2007) attempt to accomplish is to force the court to limit the patentholder’s recovery to the real economic worth of an invention – for example, to a company who might want to license that invention to use in another product or to a consumer who might purchase a product because of that very invention.

Thus, the section limiting the application of the entire market value rule to situations in which the actual invention – the advance over the prior art – forms the basis of consumer demand compensates the inventor only to the extent his invention produces something that people actually want to buy.

This section also ensures that patents on relatively minor components are not given a value in excess of their real economic worth. Where the patent does not cover something critically important to the consumer, the provision limits the patentholder’s recovery to the value of that component to the customer – and precludes a recovery based on the entire product, which may include many other patented components.

Likewise, the section requiring the court to determine whether there is already a “market price” for licensing the patent – in the form of pre-existing licenses for similar patent rights – simply measures how much a prospective licensee would be willing to pay on the open market for the right to use the patent. Of course, this is what the reasonable royalty remedy is supposed to measure.

The purpose of these provisions is obvious. First, they will limit the ability of patentholders, primarily patent trolls, to recover damages in patent litigation far in excess of the actual economic value of those patents. More importantly, however, they will reduce the threat of such inflated damages awards – a threat such plaintiffs use as leverage in licensing campaigns and settlement negotiations to secure recoveries far exceeding the worth these patents really have to the prospective licensees.

The problem with these proposed statutes, then is not their objective – to give patents the value they actually deserve – but the implementation. As written, these provisions are a judicial nightmare. They require the court to conduct a kind of “damages Markman” in which the court must decide, before giving the case to the jury, the economic value of the patent’s “specific contribution over the prior art,” the “basis” for the “market demand” for an infringing process, the “relevant market” for a claimed invention and whether that market has “similar noninfringing substitutes” for the claimed invention. Apparently, the court is also supposed to make the economic decision of which Georgia Pacific factors the jury is allowed to consider.   

The delay which will be caused in an ongoing trial will inevitably be substantial and the opportunities for reversible error in this process will be legion. Although the intent of the drafters of these provisions was certainly praiseworthy– to codify limits on jury’s overvaluing patents in awarding damages – the byzantine rules they set up to implement these objective shows that they certainly have never tried a patent case. Indeed, if the courts would simply follow the judicially- established guidelines already in place, this complex set of regulations would not be necessary.

Hopefully, calmer heads will prevail before these rules are actually imposed on the patent litigation bar and on the courts. There are better and more effective ways of reaching these objectives.

Indeed, it is not surprising that, in another section of the bill – limiting venue for patent cases to districts in which the defendant has a facility – there appears to be no appropriate venue for a patent case against an infringing foreign defendant with no facilities in the United States. Thus, a plaintiff might have jurisdiction over an infringer, but nowhere to sue the company – all dressed up and no place to go.

Links:

Forward Looking Patent Damages

Articles and Publications, Damages, Injunctions, Patent,

In the wake of eBay, courts and scholars have been working to figure out what to do after denying injunctive relief. A common suggestion is to award an ongoing royalty – often termed a compulsory license. In an impressive body of research stretching back to the year 1660, Lewis & Clark professor Tomás Gómez-Arostegui concludes that “federal courts lack the authority, in either law or equity, to award prospective compensation to plaintiffs for post-judgment copyright or patent infringements.”

Until such time as Congress creates a new form of compulsory licensing, future-damage awards and continuing royalties can only be granted in lieu of a final injunction by consent of the parties.

In non-patent cases, such as accidental death, courts regularly calculate future damages – such as earning capacity. However, in those cases, the award is based on a past tort. In patent cases, prospective damages are based upon future infringing actions.

Looking historically, Gómez-Arostegui could not find a single instance prior to 1789 where the Chancery “awarded a continuing royalty in lieu of a final injunction in infringement cases.” In cases where no injunction was granted, the court did “nothing at all” about ongoing infringement.

How does this cut:

Read the paper here.

Patent Reform 2009: Damages

Articles and Publications, Damages, Patent, Patent Legislation, ,

The most contentious portion of the Patent Reform Act of 2009 is the damages provision. The current damages statute gives little guidance to a court. Damages must be “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.” 35 U.S.C. §284. The Court may “increase the damages up to three times the amount found or assessed.” Id. The courts have given some flesh to the rough skeleton created by these statutes. One construct is the hypothetical negotiation – asking the counterfactual question of what licensing scheme would these dueling foes have agreed to if they had actually come to a licensing agreement. The Georgia Pacific factors guide the process of deternining a reasonable royalty. In some cases, courts allow a patentee to recover lost profits.

As it turns out, the damages actually awarded in patent cases are generally thought to be much higher than negotiated license agreements.  Part of the difference stems from the reality that patent damages are awarded only on patents that are known to be valid, infringed, and enforceable, and after the risk and expense of litigation have already been taken. In ordinary license negotiations, these risks lower the potential royalty rate and – in contrast – should increased the level of compensation in post-trial damages.  There is some evidence that juries simply tend toward large damage awards.

Stacking Problem: In some technology areas – such as electronics – this creates a potential problem known as royalty stacking. Most electronics products are covered by multiple patents – often dozens of patents. CDMA2000 communication standard, for instance, reportedly invringes at least 924 patents. [LINK] When each patentee is awarded a 5% royalty, it does not take long before the entire revenue is taken just to pay for intellectual property rights. If everyone has blocking rights then no business can get done, and we see the tragedy of the anti-commons. Of course, stacking is only a problem in theory. CDMA2000 is a standard actually used around the world. Producers are making (some) money. Multiple patents covering products have causes prices to be raised, but it is not clear than any market has been destroyed or even that the royalty payments outway the benefit of the innovation.

Uncertainty Problem: Jury verdicts are quite unpredictable, and because the royalty rules are so loose, damages appeals are rarely successful.

The new legislation appears to take on these problems in a way to (1) reduce the average damage award; (2) make damage awards more rational and predictable; and (3) make damages judgment more subject to appellate review.

The practical approach of the legislation is to create a “standard for calculating reasonable royalty” which require a determination of the “specific contribution over the prior art” to determine damages. Some courts already follow the rules set out in the proposed legislation. Thus, legislation advocates may refer to the damages reforms as simply a clarification that limits the actions of rogue courts.

The proposed text reads as follows:

35 USC 284(c)(1) IN GENERAL.-The court shall determine, based on the facts of the case and after adducing any further evidence the court deems necessary, which of the following methods shall be used by the court or the jury in calculating a reasonable royalty pursuant to subsection (a). The court shall also identify the factors that are relevant to the determination of a reasonable royalty, and the court or jury, as the case may be, shall consider only those factors in making such determination.

”(A) ENTIRE MARKET VALUE.-Upon a showing to the satisfaction of the court that the claimed invention’s specific contribution over the prior art is the predominant basis for market demand for an infringing product or process, damages may be based upon the entire market value of that infringing product or process.

”(B) ESTABLISHED ROYALTY BASED ON MARKETPLACE LICENSING.-Upon a showing to the satisfaction of the court that the claimed invention has been the subject of a nonexclusive license for the use made of the invention by the infringer, to a number of persons sufficient to indicate a general marketplace recognition of the reasonableness of the licensing terms, if the license was secured prior to the filing of the case before the court, and the court determines that the infringer’s use is of substantially the same scope, volume, and benefit of the rights granted under such license, damages may be determined on the basis of the terms of such license. Upon a showing to the satisfaction of the court that the claimed invention has sufficiently similar noninfringing substitutes in the relevant market, which have themselves been the subject of such nonexclusive licenses, and the court de termines that the infringer’s use is of substan tially the same scope, volume, and benefit of the rights granted under such licenses, damages may be determined on the basis of the terms of such licenses. ”

(C) VALUATION CALCULATION.-Upon a determination by the court that the showings required under subparagraphs (A) and (B) have not been made, the court shall conduct an analysis to ensure that a reasonable royalty is applied only to the portion of the economic value of the infringing product or process properly at tributable to the claimed invention’s specific contribution over the prior art. In the case of a combination invention whose elements are present individually in the prior art, the contribution over the prior art may include the value of the additional function resulting from the combination, as well as the enhanced value, if any, of some or all of the prior art elements as part of the combination, if the patentee demonstrates that value.

”(2) ADDITIONAL FACTORS.-Where the court determines it to be appropriate in determining a reasonable royalty under paragraph (1), the court may also consider, or direct the jury to consider, any other relevant factors under applicable law.

Notes:

  • I’ll use this opportunity to plug a new book by Richard Cauley: Winning the Patent Damages Case (Oxford 2009). Great book, the only problem is the $185 price tag.
  • The Bills have received numbers: H.R. 1260 is sponsored by Rep. Conyers (MI) and co-sponsored by Reps. Berman (CA), Goodlatte (VA), Jackson-Lee (TX), and Smith (TX). S. 515 is sponsored by Sen. Leahy and co-sponsored by Sens. Crapo (ID), Gillibrand (NY), Hatch (UT), Risch (ID), Schumer (NY), and Whitehouse (RI). Both Bills have been referred to their respective Judiciary Committee which are headed by the Bill sponsors.

Back Reading

Damages Tally Begin as Soon as Defendant is Given Notice of Infringement

Damages, Patent, ,

DSW Shoe Warehouse v. Shoe Pavilion (Fed. Cir. 2008)

DSW holds a utility patent and a design patent on a shoe display system. In 2006, DSW notified off-brand competitor Shoe Pavilion that its displays were infringing. Wanting to avoid trouble, Shoe Pavilion took immediate action and removed the infringing displays. (Although immediately begun, the whole take-down process took seven months.) DSW was not satisfied that the replacement design avoided infringement and subsequently sued.

Damages and Notice: The case raises several issues, but here I will focus on damages. On summary judgment, the district court held that Shoe Pavilion owed no damages for infringement by the initial design because the defendant took immediate action to stop infringing. On appeal, the CAFC vacated that opinion.

The Patent Marking Statute limits damages that may be recovered by a patentee.

In the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice. 35 U.S.C. §287(a).

The Pre-1952 Patent Statute included a similar restriction on damages. That statute was interpreted by the Supreme Court in Wine Railway (1936). There, the court held that the recovery by patentee who failed to mark products covered by the patent would be limited to damages incurred after actual notice was provided to the infringer.

The policy behind this approach is to give some level of protection to innocent infringers. However, damages begin to accrue as soon as notice is given. Thus, in this case, Shoe Pavilion is liable for the damages that occurred during the seven-month take down process.

“Without a doubt, the law offers an infringer no exception to liability for the time it takes to terminate infringing activities, no matter how expeditious and reasonable its efforts.”

Vacated and remanded.

Notes:

  • The court also vacated based on an error of claim construction – finding that the claimed “track and roller” was not limited by the preferred embodiment found in the specification.

Subsidiary’s Lost Profits Do Not Translate to Lost Profit Damages for Parent Patent Holder

Damages, Patent, Patent Cases 2008,

PatentLawPic327Mars, Inc. v. Coin Acceptors, Inc. (CoinCo) (Fed. Cir. 2008)

Way back in 1990, Mars sued CoinCo for patent infringement — asserting two patents covering technology for authenticating coins inserted into a vending machine. Eighteen years later, the parties are still battling over damages.

Lost Profits: In this decision, the CAFC affirmed that the Mars corporate structure (designed to avoid certain taxes) eliminated the company’s ability to recover damages under a “lost profits” theory.  Usually, lost profits are only available when a patentee is a market competitor. Mars itself has never made vending machine coin changers. However, its wholly owned subsidiary, MEI, did operate vending machines and licensed the patents on a non-exclusive per-use basis.  Although it was a wholly owned subsidiary, the court found that MEI’s provable lost profits due to the CoinCo infringement did not translate to lost profits for the patentee itself (Mars).  Of particular importance was the license structure between MEI and Mars that called for a straight per use license rather than a license based on a measure of profits.  Rather, lost profits require a showing that the patent holder itself had lost profits.

This decision can be seen as a continuation of the 2004 Poly-America case where the court held that the patentee could not recover lost profits for damages felt by a sister corporation. Lost profits damages are usually preferred to damages calculated as a reasonable royalty because the lost profit calculation typically results in a larger number.

PatentLawPic328Standing: The court also ruled on standing issues. (1) Prior to 1996, MEI had no standing to sue for itself because it was only a non-exclusive licensee. (2) In 1996 Mars transferred ownership to MEI — thus, at that point Mars had no standing to sue for any subsequent infringement.

Curing standing: In patent cases, standing is typically determined at the point that a claim is filed. Here, we have a seeming loss of standing. In the 2005 Schreiber decision, the CAFC held that a “temporary loss of standing during patent litigation can be cured before judgment.” Despite a half-hearted attempt, the court found that Mars had not properly cured its standing because MEI did not transfer complete ownership back to Mars.

Cornell wins $184 Million in Damages for Past Infringement by HP

Damages, District Court, Inventors, Patent, Patent Cases 2008,

Federal Circuit Judge Randall Rader has been sitting by designation as a district court judge in the Northern District of New York.  His case is an epic patent battle between Cornell University and Hewlett-Packard (HP), and the jury trial recently concluded with an $184 million calculated as 0.8% of HP’s $23 Billion in sales.

The patent — No. 4,807,115 — issued in 1989 and expired during the seven years of litigation. It is directed toward an internal computer messaging mechanism that boosts the function of multi-processor computers.

Interestingly, Cornell and HP had discussed a licensing agreement as early as 1988 (even before the patent issued). In 1997, Intel licensed the ‘115 patent for use in its Pentium Pro chips.

Unpublished Thesis: In a pre-trial decision, Judge Rader denied Cornell’s motion in limine and allowed HP to show the jury an unpublished masters degree thesis as 102(b) prior art.  The court found the thesis publicly accessible because the thesis had been cited in a later article that was in the same area of technology as the issued patent (analogous art.).

“After weighing all the circumstances of accessibility, this court views as vitally important the citation of this scholarly work in the Tjaden-Flynn article.”

Inventor Rewards: Unlike most companies, universities generally offer a percentage royalty cut for its employee-inventors. Professor Torng, the inventor of the ‘115 patent, will reportedly receive 25% of the award (if it is ever paid). Torng has announced that he’ll only keep a few million and donate the rest (perhaps over $30 million) to charity.

The post-trial decisions and eventual appeal should be interesting.

CAFC Allows Lost Profit Damages Based on Defendant’s “Offer to Sell” Infringing Product

Patent,

Patent.Law057American Seating v. USSC (Fed. Cir. 2008)

Under 35 U.S.C. Section 271(a), offering to sell a patented invention is a form of patent infringement. This case examines, inter alia, what damages might ensue from such “on sale” activities even when an infringing product is not actually manufactured or sold.

In a separate part of the case, USSC’s VPRo-I wheelchair tiedowns for mass transit were found to infringe a patent held by American Seating.  At some point, USSC stopped selling the VPRo-I and switched to a non-infringing design (presumably to avoid infringement). For pending VPRo-I orders, USSC simply notified customers that the new design would serve as a substitute.

After finding the patent valid and infringed by the offer to sell, the Michigan jury awarded American Seating lost profit damages based on the USSC’s non-infringing sales “because in those cases USSC first made infringing offers to sell the VPRo I, but ultimately delivered the [non-infringing] VPRo II.”

On appeal, the CAFC affirmed that a damage award for the non-infringing sales was appropriate because USSC had essentially pulled a bait-and-switch on its customers. Although courts have “significant latitude” in types of harms that can lead to an award of lost profits. However, plaintiffs must at least prove that the infringement was a “but for” cause of the lost profits.

The Federal Circuit’s 1999 Grain Processing decision also dealt with cases where the an infringing product was not actually sold. In that case, the court held that lost profit damages should only be available when the the product sold is not a substitute for the infringing product. Thus, lost profits would not be available if the replacement was “acceptable to all purchasers of the infringing product.” American Seating provided evidence that some customers had complained about the new model — thus proving that it was not an adequate.

Thus, the CAFC affirmed the lost profit award — finding that “absent USSC’s offer to sell the [infringing] VPRO-I, the sales would have gone to American Seating.”

Notes:

  • Look for a follow-up post on this case in the coming days discussing other lost profit issues, including damages for “collateral sales”  and a discussion of public use under 102(b).