Tag Archives: Damages

THE MYTH OF THE TRADE SECRET TROLL

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Why We Need a Federal Civil Claim for Trade Secret Misappropriation

Guest Post by James Pooley, former Deputy Director General of the World Intellectual Property Organization.  Pooley makes his full argument in a forthcoming George Mason Law Review article available here.

Trade secret theft has been a federal crime since 1996, covered by the Economic Espionage Act (“EEA”). But civil misappropriation claims remain limited to state court filings under common law or local variants of the Uniform Trade Secrets Act (“UTSA”). Calls for federal jurisdiction have grown with the increasing importance of information as a business asset and with the emergence of technology that makes theft of these assets almost infinitely easier. Recent examples involving international actors have galvanized the business community to request a straightforward solution: amend the EEA to provide a federal option for private claims.

Several bills were introduced in the 113th Congress to accomplish this, and to authorize provisional remedies for seizure of relevant property to prevent secret technology from being transferred out of the jurisdiction. The 2014 legislation was not acted on before Congress adjourned.  A revised version is pending now, the Defend Trade Secrets Act of 2015 (“DTSA”), reflected in identical House (H.R.3326) and Senate (S.1890) bills.

The approach of the DTSA is fairly simple: use existing language of the EEA where appropriate, such as the definition of a trade secret, and where other language is required to define the civil aspects, such as misappropriation and damages, use language taken from the UTSA. Indeed, the only meaningful departure from the UTSA is to add a section allowing ex parte seizures of the misappropriated property. But even that portion draws from established provisions of the Lanham Act, tightened up considerably from the 2014 bills in order to discourage abuse.

The DTSA has received virtually unanimous support from industry, and also enjoys unusually bipartisan political sponsorship, with 65 cosponsors in the House (45 Republican and 20 Democrat) and ten in the Senate (six Republican and four Democrat). The only organized opposition has come from a group of law professors who published an “open letter” in 2014 criticizing the previous draft legislation, and who have recently released another letter describing their concerns. Mainly, they argue that we don’t need federal legislation because state laws are uniform enough; that the seizure provisions are too broad; and that the DTSA would limit labor mobility by approving the so-called “inevitable disclosure doctrine.”

As I will explain below, on each of these points the professors are wrong, misled by incorrect assumptions or unjustified speculation. Indeed, in a recent journal article two of them have predicted that the legislation would unleash a never-seen-before class of commercial predator, the “trade secret troll,” who they claim would “roam free in a confused and unsettled environment, threatening or initiating lawsuits for the sole purpose of exacting settlement payments, just like patent trolls.”

This apocalyptic scenario is not only fanciful; it is absurd. While patents are exclusive rights that operate against the world, trade secrets provide no exclusivity and depend on a confidential relationship. The image of a “trade secret troll” may help draw attention to a political argument, but it is a myth, and deserves no serious consideration.

The reality of this legislation is simple and compelling. Giving trade secret owners the option to sue in federal court would fill a critical gap in effective enforcement of private rights against cross-border misappropriation that in the digital age has become too stealthy and quick to be dealt with predictably in state courts. The bills would accomplish this by effecting only very modest changes, relying heavily on existing laws and rules. The seizure provisions in particular are so narrowly drawn that only the most clearly aggrieved plaintiffs would risk invoking the procedure. Having no pre-emptive effect, the federal law would leave in place all relevant state laws and policies, including those relating to mobility of labor.

U.S. trade secret law emerged in the nineteenth century to accommodate the shift from agrarian and cottage production to larger-scale industry, in which the secrets of production would have to be shared with workers or with business partners. Court decisions sought to enforce the confidence placed in those who were given access to valuable information about machines, recipes and processes. At the core of every case was a confidential relationship. Protecting this trust, the courts explained, was a simple matter of enforcing morality in the marketplace.

The common law origins of trade secrets – in contrast to the federal patent statute – meant that the majority of cases were heard in state court. Even when a federal court took diversity or supplemental jurisdiction over a trade secret dispute, it applied the law of the state in which it sat. And at first there was little variation, with most states looking to the Restatement of Torts § 757 as a guide. But as industrial development continued through the middle of the twentieth century, legal foundations shifted, and the reporters of the Second Restatement dropped the subject completely.

Meanwhile, a school of thought had developed among commentators that trade secret law should be abolished altogether because it was inconsistent with, and therefore preempted by, federal patent law. This argument was famously rejected by the U.S. Supreme Court in Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974). Two important public interests, the Court explained, were served by trade secret law: the “maintenance of standards of commercial ethics and the encouragement of invention.” Without guaranteed secrecy, businesses would be left to expensive self-help security measures that would disadvantage smaller competitors and discourage dissemination of information through sharing. And as a practical matter, there was no conflict between the two systems because they operate so differently: patent law is strong, providing an exclusive right “against the world;” while trade secret rights are “far weaker,” because they do not protect against reverse engineering or independent development.

With the Second Restatement’s decision not to treat the issue, some were concerned that trade secret law would become too fractured and inconsistent for companies which had been increasingly doing business across state lines. Therefore, in 1979 the National Conference of Commissioners on Uniform State Laws issued the first of two versions of the UTSA, proposing harmonized rules on establishing and enforcing trade secret rights. Measured by adoption rates, the UTSA has been a great success, with 47 of the 50 states so far embracing it (New York is the leading holdout). However, measured by its objective of uniformity, the law has been a disappointment. Unlike the UCC, the UTSA has frequently been enacted with customized features.

A few examples will help illustrate the scope of the problem. California dropped the language requiring that a trade secret be not “readily ascertainable,” with the result that the defendant is required to specially plead that circumstance as an affirmative defense. Illinois also eliminated the “readily ascertainable” language, and it prohibits royalty injunction orders, sets a different limitations period and allows permanent injunctions. Idaho requires that computer programs carry a “copyright or other proprietary or confidential marking” to qualify for protection.  Georgia limits protection of customer lists to physical embodiments, in effect allowing employees to appropriate such information in (human) memory. South Carolina’s version of the UTSA requires a court hearing an injunction request to consider “average rate of business growth” in determining a head start period, and prescribes very particular rules for discovery of trade secret information, even for local discovery in aid of an action pending in another jurisdiction.

When Congress considered the EEA in 1996, there was some discussion of adding a civil right of action, but this was deemed impractical in view of the need for swift legislative action. In the years since its enactment, the EEA has had a mixed record of success. As reported by one veteran prosecutor, the average of about eight prosecutions per year is a “languid pace” that probably has done little to create a deterrent effect. In part this may be due to a reluctance of victims to bring cases to the prosecutor, either because of a loss of control or Fifth Amendment effects on civil claims, or it may be due to a lack of resources or interest within the various offices of the U.S. Attorneys, who have discretion whether to accept qualifying cases.

Calls for a federal trade secret law with a private right of action had already begun before the EEA was passed. After it became law, a number of scholars noted the anomaly and suggested that, because the national economy had become primarily knowledge-based, and because even with the UTSA state law was far from uniform, a federal civil law should be enacted. More recent commentary, while continuing to emphasize the drawbacks of variations in state law, also has pointed out the economic advantages of federalization, particularly for small businesses, which rely more heavily on secrecy than on patenting, as well as the procedural advantages for trade secret owners, including national service of process.

The highly-publicized cyberattacks of recent years have exposed not only the precarious security of personal financial and health information, but also the vulnerability of American corporate secrets. Thirty years ago information security consisted mainly of guarding the photocopier and watching who went in and out the front door. Now, with the Internet connected to millions of smartphones, and with electronic storage devices the size of a coin, information assets (which account for over 80% of the value of U.S. public companies) can be moved quickly and silently across state and international borders. In that context, existing procedures at the state level seem impossibly quaint. If a case in Illinois requires testimony of a witness in California, the plaintiff has to petition its home court to authorize a deposition, and then file an action in California based on the Illinois order, to secure the required subpoena. During the weeks or months of this process, the witness could easily have left the country, with the secrets in her pocket.

In other words, the time-critical nature of interstate and international misappropriation of valuable digitized data requires an immediate and sophisticated response mechanism, and neither state law nor the EEA criminal framework provides a satisfactory solution. Federal courts, however, can provide the necessary resource. First, they will be operating under a single, national standard for trade secret misappropriation and a transparent set of procedural rules, offering predictability and ease of use. Second, they will provide nationwide service of process and a unified approach to discovery, enabling quick action by trade secret owners even when confronted with actors in multiple jurisdictions. Third, as a result of their extensive experience with complex cross-border litigation involving intellectual property, they will be able to resolve ex parte matters fairly and jurisdictional issues quickly and efficiently. Fourth, their generally more predictable discovery procedures will serve the legitimate needs of trade secret plaintiffs, who typically must develop most of the facts to prove their case through defendants and third parties.

In this context, the objections raised by the law professors are not convincing. First, it is not fair to describe existing state law as “coherent,” “robust and uniform,” so that U.S. businesses already enjoy “a high level of predictability.” The rhetoric does not obscure the reality of a patchwork of differing standards and rules – in some ways more divergent than before enactment of the UTSA – that necessarily creates friction and inefficiency for companies with interstate operations.

Second, while admitting that the current language on ex parte seizure is “more limited in scope” than the 2014 legislation (for example, only property “necessary to prevent the propagation or dissemination of the trade secret” can be seized), the professors think this tightening is not enough and that the provision “may still result in significant harm.” No evidence is provided, but only speculation that mere invocation of the procedure might cause small businesses to “capitulate,” and that the “chilling effect on innovation and job growth . . . could be profound.” Again, the reality could hardly be more different. The DTSA is loaded with limitations making seizure very difficult to achieve, and with liabilities making it prohibitively expensive to be wrong in asking for it. In the unusual case where the plaintiff has no substantial basis for the claim, the defendant will simply file an opposition, the seizure will be dissolved, and the plaintiff will pay for the harm. Surely the benefits of the DTSA are worth that occasional risk.

Third, the professors assert that new language, added to the DTSA to ensure that mobility of labor is respected, embraces the so-called “inevitable disclosure doctrine,” which they view as the equivalent of a judge-made noncompetition agreement. In fact, that “doctrine” is nothing more than a method of analysis under the common-sense UTSA provision allowing injunctions against “threatened misappropriation.” This method has been applied thoughtfully in a majority of jurisdictions, resulting in a wide range of conditional remedies, and has only rarely been applied in a way that stops anyone from taking a new job.

The DTSA is sorely needed to fill a gap in remedies available to U.S. businesses that now operate in an information-based, globalized economy. This is one of those instances where federal structures are required to address a critical set of interstate and international problems. The DTSA has been carefully constructed to deter and punish abuse. Using well-established definitions and norms, it provides a choice to file a familiar claim in an effective forum. And there is absolutely no danger that enacting this statute will generate some new form of “troll” behavior to this point unknown in trade secret law.

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James Pooley was most recently Deputy Director General of the World Intellectual Property Organization in Geneva, where he was responsible for managing the international patent system. For 37 years before that he was a trial lawyer in California, handling primarily trade secret and patent disputes. He taught trade law and litigation as an adjunct professor at the University of California, Berkeley, and at Santa Clara University. He is the author of the treatise “Trade Secrets” (Law Journal Press, updated 2014) and a co-author of the Patent Case Management Judicial Guide (Federal Judicial Center 2009, 2015). His most recent business book is Secrets: Managing Information Assets in the Age of Cyberespionage (Verus Press 2015).  Mr. Pooley currently serves as Chairman of the Board of the National Inventors Hall of Fame.

Federal Circuit to Wait on Carnegie Mellon Willfulness Case until the Supreme Court Decides Halo and Stryker

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Carnegie Mellon University v. Marvell Tech (Fed. Cir. 2015) [CMUMarvellEnBanc]

The Federal Circuit has issued an interesting en banc order in this billion-dollar-case between the university patentee and the storage/chip maker Marvell. The Pennsylvania district court had originally awarded $1.5 billion to the university based upon a judgment of willful infringement. On appeal, however, the Federal Circuit panel reduced that award to a still-healthy but much smaller $278 million. The reduction was based upon (1) elimination of punitive damages for willfulness since Marvell had an objectively reasonable argument of invalidity; and (2) potential elimination of foreign sales from the award calculation – sales contracts were apparently “inked” in the US but then manufactured and delivered abroad. Regarding this cross-border infringement, the panel did not fully deny the availability of damages but instead remanded for further development as to whether the chips made and used outside of the U.S. could be considered “sold” in the U.S. based upon the contracting location.

After cross en banc petitions by Carnegie Mellon and Marvell, the court now writes:

Carnegie Mellon’s petition for rehearing en banc is denied in part and held in abeyance in part. The court will hold in abeyance any decision on the request for rehearing en banc with respect to the first issue raised in Carnegie Mellon’s petition, which seeks review of the panel’s ruling on the enhancement of damages issue. The court will hold Carnegie Mellon’s petition as to that issue pending the Supreme Court’s decision in Halo Electronics, Inc. v. Pulse Electronics, Inc., 769 F.3d 1371 (Fed. Cir. 2014) cert. granted, No. 14-1513, 2015 WL 3883472 (U.S. Oct. 19, 2015) and Stryker Corp. v. Zimmer, Inc., 782 F.3d 649 (Fed. Cir. 2015) cert. granted, No. 14-1520, 2015 WL 3883499 (U.S. Oct. 19, 2015).

Carnegie Mellon’s petition for rehearing en banc is otherwise denied. Marvell’s petition for rehearing and rehearing en banc is denied.

A partial mandate will issue returning the case to the district court, which shall have discretion to determine how and when best to handle the proceedings on remand.

Willfulness at the Supreme Court: In my view, there is a good chance that the Supreme Court will dramatically change course on willfulness doctrine. The history of patent law had given broad discretion to district courts to determine the appropriate circumstances for awarding punitive damages. And, that history fits well with other areas of law as well as with the Patent Act that broadly and simply states that “the court may increase the damages up to three times the amount found or assessed.” 35 U.S.C. §284. Note here, that the statute does not even require willful infringement as a prerequisite and certainly does not delve into the layered subjective/objective approach currently required by the Federal Circuit. Rather, the only statutory limitation on enhanced damages is that they
“shall not apply to provisional rights under §154 (d).”

In Carnegie Mellon’s case, the enhanced damages were about 20% of the total $1.5 billion (updated by 1000x).

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Generally, the Federal Circuit’s strategy here is interesting and overall I like it. In the past there have been times where the Federal Circuit silently delayed its decision making. This case is also big-money, I wonder wither the Federal Circuit will be willing to delay all of its willfulness cases pending the outcome of Halo and Stryker. And, is this a suggestion to district courts to also delay? An important element of the decision here is that there is a parallel remand and so the willfulness issue is not the last remaining issue in the case and so the court’s delay is likely not delaying the final outcome.

Federal Circuit: Denies En Banc Rehearing on Lost Profit Sales for Component Export

Patent,

In a split opinion, the Federal Circuit has denied WesternGeco’s en banc petition on the issue of whether a patentee can collect lost profit damages stemming from foreign sales that constitute infringement under 35 U.S.C. § 271(f).   The question presented:

When there has been a finding of infringement under 35 U.S.C. § 271(f) for supplying components of a patented system to be combined outside the United States, is a patentee, in effect, categorically barred from recovering proven lost profits that occurred outside the United States, which were the direct and foreseeable result of the infringement under § 271(f)?

In its original panel decision, the Federal Circuit indicated that its tradition of avoiding extraterritorial application of U.S. patent law led it to apply Section 271(f) in a restrictive rather than expansive way.

 

WesternGeco cannot recover lost profits resulting from its failure to win foreign service contracts, the failure of which allegedly resulted from ION’s supplying infringing products to WesternGeco’s competitors. . . . Section 271(f) does not eliminate the presumption against extraterritoriality. Instead, it creates a limited exception. . . . It is the act of exporting the components from the United States which creates the liability. . . . Just as the United States seller or exporter of a final product cannot be liable for use abroad, so too the United States exporter of the component parts cannot be liable for use of the infringing article abroad.

Of course, the fact that WesternGeco is not entitled under United States patent law to lost profits from the foreign uses of its patented invention does not mean that it is entitled to no compensation. Patentees are still entitled to a reasonable royalty, and WesternGeco received such a royalty here. . . .

As he did in the original panel decision, Judge Wallach also dissented here – joined by Judges Newman and Reyna.  In the original opinion, Judge Wallach wrote:

[T]he limited geographic reach of United States patent law does not mean activities occurring outside the United States are categorically disregarded when determining issues of patent infringement. . . . [In 271(f)] Congress imposed liability on those supplying from the United States components of a patented invention “in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.” . . .

In general, a patentee is entitled to full compensatory damages where infringement is found. . . . . The[] general principles of full compensation, of course, do not directly address the question of whether foreign activities may be considered when calculating such compensation. The Supreme Court, however, has answered this question in the affirmative, looking to noninfringing foreign sales to calculate lost profits where the patented product is manufactured in the United States. For example, [see] Goulds’ Manufacturing Co. v. Cowing.

There is a strong chance that WesternGeco will petition for a writ of certiorari and this type of international patent law case has some background before the court. See, Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007) and Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 531 (1972).

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As a comment, I should mention here that the question petitioned is somewhat disingenuous in that the lost-profits would be available associated with foreign component sales, just not those tied to sale of the would-be-infringing-product. The problem for the patentee is that the real profits are in the final product not the underlying components.

Impact of an Inter Partes Review Petition Denial on Willfulness

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WARF v. Apple (W.D. Wisconsin 2015)

Following a jury verdict on infringement and validity (October 10) and another verdict on damages awarding $230 million in reasonable royalty (October 19), Judge Conley (W.D.Wisc.) has now quickly disposed of the case by entering judgment in favor of the patentee (WARF) the amount awarded and denying Apple’s motion for judgment as a matter of law.  The case is now set for appeal to the Federal Circuit.

During trial the Judge rejected WARF’s willfulness claim – finding that Apple had a pretty good – thought ultimately losing – obviousness argument:

Apple demonstrated at trial that the elements of the asserted claims of the ‘752 patent were all known in the prior art, and many were well-known for those skilled in the art. Indeed, WARF did not meaningfully dispute this. As a result, the only factual dispute as to Apple’s obviousness defense was whether a person of ordinary skill in the art would have combined those elements and had a reasonable chance of doing so successfully.

Under the current requirement of both objectively and subjectively willful behavior, the court found that WARF could not prove with clear and convincing evidence that Apple acted “despite an objectively high likelihood that its actions constituted infringement of a valid patent.”

It turns out that Apple had also presented its obviousness argument to the PTAB in an inter partes review challenge. In that case, the Board refused to grant the IPR petition – finding that Apple “has not shown, under 35 U.S.C. § 314(a), that there is a reasonable likelihood that it will prevail with respect to at least one of the challenged claims.” Back in the lawsuit, Judge Conley rejected WARF’s argument that the PTAB’s denial is relevant.  Unfortunately, it appears that the Judge’s ruling is based upon a misunderstanding of PTAB procedure and burdens. In particular, the judge rested his decision upon the incorrect notions that IPR cancellation requires “clear and convincing evidence” and that granting an IPR petition requires proof that the challenger is “likely to prevail” on the merits. The Judge writes:

All PTAB found was that Apple was not likely to prevail on its defense by proving obviousness by clear and convincing evidence. PTAB did not consider whether this defense was objectively reasonable or raised a substantial question. As such, the PTAB finding — like the jury’s finding rejecting the invalidity challenge — does not settle the issue of whether Apple’s defense was objectively reckless.

Of course, the PTAB cancellation is based upon a substantially lower standard – a preponderance of the evidence – not clear and convincing evidence. In addition, the PTAB decision at the petition stage looks only for a “reasonable likelihood” of prevailing rather than simply being “likely” to prevail. (In most cases, the ‘reasonable’ modifier makes it easier to prove a conjecture: compare “certainty” with “reasonable certainty.”)

Although the PTAB decision is not identically written to the willfulness test, it is not clear to me which standard is higher. And, I think that the statistics would play out here to easily show that it is a rare case where a well-pled obviousness argument was rejected by the PTAB at the petition stage and then relied upon by a jury to invalidate a patent.

The comparison:

  • In the Inter Partes Review, the Patent Office determined that Apple’s obviousness argument lacked a reasonable likelihood of winning on validity, keeping in mind that the patent is not presumed valid and that obviousness must be proven by only a preponderance of the evidence.
  • For willfulness, the patentee must show that an objective observer would perceive a high likelihood that the patent would be found valid (really, not invalid). Since validity is presumed in court challenges, what happens here is that the willfulness burden shifts to the defense to present a obviousness argument strong enough to convince an objective observer that the patentee had less than a high likelihood of winning on validity, keeping in mind the presumption of validity and requirement of clear-and-convincing evidence of obviousness.

I will pause here to apologize for the complexity of the comparison. You can thank the Federal Circuit for creating these tricky rules to replace what has traditionally (and by statute) been a much more open doctrine. The Supreme Court is addressing these issues in Halo and Stryker.

The point here for me is that Apple was unable to pass the petition stage of an IPR – i.e., they did not have a reasonable chance of winning on the lowered standard for invalidity. At least we can say that they had even less of a shot of winning with the same challenge presented in court with the higher burden. In context, this seems to me that the PTAB decision is quite relevant to the question presented here.

[WARFAppleWillfulness]

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I’ll note here that the district court briefing on the issue was all filed under seal and not available.  In addition, the district court has just agreed to seal a large set of trial evidence and demonstrative exhibits.  It appears that WARF offered no objection – why would they?  Here, at the least the court should order a redaction rather than complete sealing to support the strong public interest in patent cases and in an open court system.  See also, Secret Patent Trials are OK; Access to Courts; A Call for Restraint in Sealing Court Records.

Where does a Defendant “Reside” for Jurisdictional Purposes in Patent Infringement Cases?

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By Dennis Crouch

In re TC Heartland LLC (on mandamus to the Fed Cir. 2015) (read-it: Heartland Mand)

An interesting mandamus action was recently filed by the Prof John Duffy and Jim Dabney (both now with Hughes Hubbard) raising the following: Whether 28 U.S.C. § 1400(b) precludes the district court from hearing this action.

Section 1400(b) is the jurisdiction statute for patent cases indicates two mechanisms for jurisdiction: (1) the district where the defendant resides or (2) the district where the defendant infringed and has a regular place of business.

Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.

28 U.S.C. § 1400(b). Section 1391(c) further provides for a broad definition of residency, broadly including both (1) the district of domicile and (2) any district where the defendant is subject to the court’s personal jurisdiction on the issue of the case.

The question ultimately raised by the case is whether the broad residency definition of §1391(c) applies to modify and expand the “resides” language of 1400(b).

The history goes back-and-forth: In Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957), the Supreme Court ruled that “28 U.S.C. § 1400(b) is the sole and exclusive provision controlling venue in patent infringement actions, and that it is not to be supplemented by the provisions of 28 U.S.C. § 1391(c).” Then in 1988, §1391(c) was amended to expand the definition of residency and also to include a statement that its residency definition was “for purposes of venue under this chapter.” Subsequently, the Federal Circuit in VE Holdings held that the 1988 amendment overruled Fourco and that the expanded residency definition §1391(c) now applies in patent cases since §1400 (the patent jurisdiction provision) is in the same chapter as §1391. In 2011, Congress again changed its statute – this time repealing the “for purposes of venue under this chapter” and instead added in that the statute applies in all civil cases “except as otherwise provided by law.”

The petition argues that VM Holdings was wrongly decided in the first place and basically led to the reality known as the Eastern District of Texas. In the alternative, the petition also argues that the 2011 amendment overruled VM Holdings.

VE Holding has produced enormous venue shopping opportunities in patent infringement actions to the point where, in the most recent year, one district (E.D. Tex.) has 50% more patent filings than the next most popular district (D. Del.) and more than four times as many filings as the district with the third most patent case filings. . . . “The abuses engendered by this extensive venue,” Stonite Products Co. v. Melvin Lloyd Co., 315 US 561 (1942), are precisely the sort of abuses that were prevented by the Supreme Court’s decisions on § 1400(b) and that would be prevented once again with a return to those controlling precedents.

What isn’t clear to me is whether a mandamus panel has authority to overrule the prior precedent. Of course, an en banc panel will have that authority and in their petition Duffy & Dabney particularly request en banc consideration.

Personal Jurisdiction: The petitioner here also argues an additional personal jurisdiction question that begins with the standard notion that each act of infringement is a separate act of infringement. Their argument then is that the court only has specific personal jurisdiction with reference to allegedly infringing Delaware sales and not the sales in other jurisdictions. The usual practice in patent cases is that once the court has specific personal jurisdiction based upon one alleged act of infringement directed to the state that the court can then adjudge infringement allegations arising nationwide. Of course, that result contravenes the usual rule that “specific personal jurisdiction is limited to claims that arise from “an ‘activity or an occurrence that takes place in the forum state.'” Walden (2014). In its brief, the petitioner does a fine job of distinguishing Keeton v. Hustler (1984) that allowed for nationwide damages for defamation. The difference from patent law is that the substantive single publication rule for defamation means that the nationwide damages all stemmed from the same tortious act that led to the specific personal jurisdiction in NH; in the patent context sales in one state that might create personal jurisdiction in that state are separate acts of infringement than sales in another state. Thus, the petitioner explains: “The district court here plainly lacks personal jurisdiction to adjudicate the merits of claims arising from non-Delaware transactions or events.”

At first glance, you might think that petitioner’s rule would lead to a patentee having to sue a defendant separately in each state across the nation. That would only be true if there was no location with general jurisdiction over the defendant – nationwide claims would still be available in any state with general jurisdiction over a defendant. In addition, the availability of multi-district litigation would streamline cases where multiple parallel lawsuits are filed.

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about_energy_black_cherry_bottle[1]The case below is Kraft Foods v. TC Heartland (D.Del.) and alleges infringement of three patents covering the packaging and contents of a flavored liquid beverage concentrate such as Kraft’s MiO water enhancer. U.S. Patent Nos. 8,293,299; 8,511,472; and 8,603,557.  TC Heartland makes its competing “Splash” water enhancers from its Carmel, Indiana HQ.

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Additional Docs:

 

Federal Circuit on Fee Award and Partial Stipulated Agreements

Patent,

Integrated Tech Corp (ITC) v. Rudolph Tech (Fed. Cir. 2015)

Rudolph and ITC both make testers to test semiconductor chip testers (yes, layers of testing here). Basically, their equipment looks for bent and damaged probe wires that are used in the testing process. In 2006, ITC sued Rudolph for infringing its U.S. Patent No. 6,118,894 covering testing systems and methods.

At some point after being sued, Rudolph updated its software with a redesign. However, the trial court found that both the original and the redesign infringed and awarded both enhanced damages for willful infringement (on the re-design) and attorney fees. The fees were at least partially based upon changes in Rudolph’s CEO’s testimony and the eventual revelation that he knew Rudolph’s original design was infringing but continued to argue non-infringement. In an original appeal, the Federal Circuit altered the claim construction and found that the redesign did not infringe and, as a result vacated the willfulness and attorney fee issues.

On remand, the district court then reinstated the attorney fees – finding that:

[T]he record establishes the following: Rudolph hid its infringement for years, provided false discovery responses, filed summary judgment papers even though it knew its product infringed, argued a never fully explained theory that ITC did not own the underlying patent, and during and after trial played semantic games regarding what its machines did and what functions were important to it and its customers. . . . The striking weakness of Rudolph’s position regarding its pre-2007 PRVX machines, as well as the unreasonable manner in which it litigated the case through trial and post-trial motions, satisfy the Supreme Court’s standard under § 285 for awarding fees. In fact, either the substantive strength of many of Rudolph’s litigating positions or the “unreasonable manner in which the case was litigated” make this case stand out from others. An award of fees is appropriate. The parties previously stipulated to the amount of fees [as $3.25 million].

On appeal for the second time, the Federal Circuit has now affirmed that a fee award was proper – holding that the district court did not abuse its discretion in awarding fees – particularly citing Rudolph’s CEO (Ronald Seubert’s “inconsistent deposition and trial testimony”).

Stipulating the Amount of Fees: The bulk of the Federal Circuit’s opinion focused on the stipulation — Prior to the first appeal, the parties had stipulated to the amount of attorney fees as $3.25 million. The parties agreed particularly that “Rudolph will not contest the reasonableness of ITC’s request for fees in the amount of $3,252,228.” On appeal here, however, the Federal Circuit ruled Rudolph can (despite the stipulation) still challenge the amount of fees.

The Federal Circuit implicitly agreed that the stipulated fee contract is binding, but found that it inapposite to the challenge here since the stipulation occurred prior to the first appeal and the first appeal resulted in Rudolph winning on a number of important issues (e.g., the re-design is no longer considered infringing). In particular, Rudolph is not challenging the “reasonableness” of the fees that was stipulated-to but rather whether the fee award can properly be tied to the new – much more limited – scope of liability. The Federal Circuit relied upon its contractual analysis to reach its conclusion, which suggests that a well drafted contract could have fully settled the issue. However, the court also indicated that fee award must “bear some relation to the extent of the misconduct” – thus indicating that even a well drafted fee agreement stipulation would not be enforceable if not tied to the misconduct.

A general take-away here is to also take-care with regard to contractual agreements with a party in the midst of an ongoing bet-your-business litigation – it is likely to be parsed fairly tightly and given de novo review by the Federal Circuit.

Supreme Court to hear cases on Federal Circuit’s Rigid Limits on Treble Damages

Patent,

The Supreme Court has now granted certiorari in two enhanced fee award patent cases: Halo Electronics, Inc. v. Pulse Electronics, Inc., S.Ct. No. 14-1513 and Stryker Corp. v. Zimmer, Inc., No. 14-1520.

The court linked the two together and will hold one big oral arguments (one hour) focusing on whether the Federal Circuit’s rigid test limiting enhanced patent damages is appropriate — especially following the Supreme Court’s decision in Octane Fitness where the Supreme Court rejected a parallel rigid test in the fee-shifting situation.

Those familiar with treble-damages know that the Federal Circuit has created a complex and rigid test for determining whether such awards may be granted.  The statute though is simple and only states that “the court may increase the damages up to three times the amount found or assessed.” 35 U.S.C. 284.

In this case, the Supreme Court is very likely to require flexibility – what is unclear is what level of flexibility will be allowed. For instance, will enhanced damages continue to be limited to willful infringement?

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Questions presented (both of these appear to be in close parallel):

Halo: Whether the Federal Circuit erred by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. § 284, that is the same as the rigid, two-part test this Court rejected last term in Octane Fitness, LLC v. ICON Health & Fitness, Inc. for imposing attorney fees under the similarly-worded 35 U.S.C. § 285.

Stryker: Whether the Federal Circuit improperly abrogated the plain meaning of 35 U.S.C. § 284 by forbidding any award of enhanced damages unless there is a finding of willfulness under a rigid, two-part test, when this Court recently rejected an analogous framework imposed on 35 U.S.C. § 285, the statute providing for attorneys’ fee awards in exceptional cases.

 

Federal Circuit Summarily Affirms Apple v. Samsung judgment without Merits Briefing

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Apple v. Samsung (Fed. Cir. 2015) (SamsungSummaryAffirm)

Most recently in the patent battle between Apple and Samsung, district court Judge Koh awarded $550 million to Apple for based largely upon design patent infringement findings.  That awarded followed immediately after the Federal Circuit’s 2015 remand to Judge Koh “for immediate entry of final judgment.”  Samsung is again appealing the damages ruling, but meanwhile there remains the question of whether Samsung needs to go ahead and pay the money or can stay execution of the judgment.

The Federal Rules of Civil Procedure allow a party to stay payment of money damages (but not injunctive relief) pending appeal of a final judgment and upon payment of a “supersedeas bond.”

Fed. R. Civ. Pro. 62(d): Stay with Bond on Appeal. If an appeal is taken, the appellant may obtain a stay by supersedeas bond…. The bond may be given upon or after filing the notice of appeal or after obtaining the order allowing the appeal. The stay takes effect when the court approves the bond.

Here, Samsung requested that Judge Koh accept $600 million as the bond, but Apple objected – arguing that Samsung’s substantive appeal is frivolous.  Because Judge Koh had not ruled on the bond request, Samsung filed an emergency appeal to have the Bond accepted.  As part of its briefing, Apple also requested “Summary Affirmance” of the district court’s final judgment regarding the half-billion-dollar judgment.

In the appeal, the Federal Circuit has sided with Apple – not only refusing to grant the bond but also summarily affirming Judge Koh’s damages award (that was already subject to a prior appeal).

Summary affirmance is appropriate when “the position of one party is so clearly correct as a matter of law that no substantial question regarding the outcome of the appeal exists.” Joshua v. United States, 17 F.3d 378, 380 (Fed. Cir. 1994). We have reviewed the parties’ arguments and conclude that summary affirmance is appropriate.

The Federal Circuit had granted a temporary stay of execution of the award and indicated that the stay would continue for seven days and by that time Samsung must have paid the money or be in contempt of court (absent action from the en banc Federal Circuit court or the Supreme Court).

In all likelihood, Samsung will immediately (today or tomorrow) file a request for rehearing and the en banc court may agree with the adjudged infringer that the summary affirmance shortcut was too quick.  In its briefing, Samsung wrote:

A motion for approval of a supersedeas bond is not … the proper vehicle to decide or even address the merits of an appeal. Indeed, Apple cites no decision permitting such an inquiry in this context, let alone one disapproving a supersedeas bond based on such an inquiry.

If it ever reached the merits, Samsung has indicated its planned appeal strategy on the following questions:

  1. Whether the PTO’s final decision* invalidating a patent-in-suit is entitled to collateral estoppel effect in a pending federal court case.
  2. Whether a district court my enter a partial final judgment that does not satisfy Fed. R. Civ. Pro. 54(b).

Absent en banc rehearing, those issues will not be addressed in this case.

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* The “PTO Final Decision” raised by Samsung refers to one of Apple’s infringed patents – No 7,844,915.  That patent has been working its way through the third-party-requested ex parte reexamination process since 2012.  Most recently, the examiner issued a final rejection of the asserted claims and that judgment was affirmed by the PTAB and Apple’s request for rehearing denied.  The patent covers the “pinch-to-zoom” feature of Apple’s iPhone.

Design Patent Damages

Patent,

By Dennis Crouch

Nordock v. Systems Inc (PowerAmp) (Fed. Cir. 2015)

Nordock’s asserted design patent covers the ornamental design of a lip and hinge plate for a dock leveler. (U.S. Patent No. D579,754). The lever is designed to be attached to a truck loading and can then be adjusted to provide a smoother linkage between the dock and the truck being loaded/unloaded. As a design patent, the patentee does not claim a new and useful invention, but rather the “ornamental design” as shown in the figure below.

Disgorging all of the infringer’s profits: A jury sided with the patentee on infringement and validity, but awarded only $46,000 in reasonable royalty damages. On appeal, the Federal Circuit vacated – finding that the district court had improperly calculated the profit-disgorgement damages.

A design patent holder may seek damages under the standard patent damages statute 35 U.S.C. 284 that sets a floor for damages as “a reasonable royalty for the use made of the invention by the infringer.” As an alternative, the patentee can collect damages under the design-patent-damages provision codified in 35 U.S.C. 289. Under Section 289, an infringer is “be liable to the owner to the extent of his total profit, but not less than $250.” To be clear, when the statute speaks of “his total profits” – that refers to the total profits of the infringer. Opining on the statute, the Federal Circuit has written that § 289 requires “the disgorgement of the infringers’ profits to the patent holder, such that the infringers retain no profit from their wrong.” Nike Inc. v. Wal-Mart Stores, Inc., 138 F.3d 1437 (Fed. Cir. 1998). The Federal Circuit has ruled that a patentee can collect either of these damages theories, but not both. Catalina Lighting, Inc. v. Lamps Plus, Inc., 295 F.3d 1277 (Fed. Cir. 2002). That result is also demanded by the statutory language that “[n]othing 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.”

At trial, the district court forced an apportionment of profits – requiring a calculation the infringer’s profits associated with the lip and hinge plate even though the infringer sold the dock leveler with the plate as an entire unit. As it recently did in Apple, the Federal Circuit here rejects that approach:

[W]e recently reiterated that apportioning profits in the context of design patent infringement is not appropriate, and that “Section 289 explicitly authorizes the award of total profit from the article of manufacture bearing the patented design.” Apple Inc. v. Samsung Elecs. Co., 786 F.3d 983 (Fed. Cir. 2015) (rejecting Samsung’s attempt to limit the profits awarded to the “portion of the product as sold that incorporates or embodies the subject matter of the patent”); see also Nike, (discussing the legislative history of § 289 and Congress’s decision to remove “the need to apportion the infringer’s profits between the patented design and the article bearing the design”).

Here, the dock is welded-to and sold as a unit with the dock leveler and – as such – the calculated profits must be associated with the entire dock leveler being sold. This result should boost the patentee’s damages up to at least $600,000, which represents the infringer’s total profits associated with the infringing sales.

Based upon this error, the Federal Circuit ordered a new trial on damages.

Is it Functional? Preserving the Appeal: There is no question that the design patent here covers a functional invention. The question raised by the infringer’s cross-appeal is whether it is impermissibly functional such that the design patent is invalid. However, in the appeal, the Federal Circuit ruled that argument to be waived because Systems’ counsel “failed to renew the motion for JMOL as to validity with sufficient particularity.” Here, defendant’s counsel gave a general motion following the verdict stating that “as a routine matter whatever motions we made during the trial, JMOL and so forth, we would renew those motions to the extent that they are necessary. . . . Everything we made we renew. I’m not sure what that is, but just for the record whatever we said before.” The patentee did not file any further particular post-verdict motions with respect to validity and – as such – the Federal Circuit ruled that the general post-verdict motion was insufficient to preserve the infringer’s rights.

Is it Functional? The Test: As an alternative judgment, the court also ruled the jury had been presented with sufficient evidence to support a not-impermissibly-functional verdict.

A design patent will be deemed invalid if the claimed design “as a whole, is dictated by functionality.” Factors often considered in the functionality analysis include:

  • Whether the protected design represents the best design;
  • Whether alternative designs would adversely affect the utility of the specified article;
  • Whether there are any concomitant utility patents;
  • Whether the advertising touts particular features of the design as having specific utility; and
  • Whether there are any elements in the design or an overall appearance clearly not dictated by function.

High Point Design LLC v. Buyers Direct, Inc., 730 F.3d 1301 (Fed. Cir. 2013) (these factors “may help”). At trial, the jury heard testimony from the patentee indicating that the design was intended to be distinctive and ornamental, that the claimed plate is not necessary to perform the dock leveling function, and that other designs are available to achieve the same utilitarian purpose. “On this record, there was substantial evidence from which a jury could conclude that the claimed design is not dictated by function.”

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There has been some outcry regarding the relatively large disgorgement profits without any proof of an innovative leap or a business impact of the design. However, up to now there have been no congressional proposals on point.  In 1946, Congress eliminated equitable disgorgement from utility patent doctrine. (as interpreted by Aro II (1964)).

The pending design patent legislation would excuse spare-auto-parts manufacturers and sellers from liability.

Federal Circuit: Damages Expert Credibility is a Question for the Jury

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Summit 6 v. Samsung (Fed. Cir. 2015)

A jury sided with the patentee – finding that Summit 6 had proven infringement and that Samsung had failed to prove invalidity of U.S. Patent No. 7,765,482 (claims 38, 40, 44-46, and 49).  The award – $15 million in damages.  On appeal, the Federal Circuit affirms that judgment.  Here, I’ll focus on the damages issues.

 

Experts: In a Daubert appeal, Samsung asked the Federal Circuit to rule that Summit 6’s damages expert’s testimony was inadmissible.  The general rules for expert testimony are found in Fed. R. Evid. 702 and allows testimony from a qualified expert relating to:

(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods; and

(d) the expert has reliably applied the principles and methods to the facts of the case.

Although a court may exclude testimony based upon unreliable principles or methods, once that threshold has been passed the question of expert credibility goes to the fact finder and may be uncovered by “[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.” Daubert.

Here, the damages expert (Paul Benoit) relied upon an unpublished methodology based upon the premise “that a feature’s use is proportional to its value.”   On appeal, the Federal Circuit indicated that this type of “analytical method” for calculating damages was sufficient to pass as expert testimony and be relied upon by a jury.

[W]here the methodology is reasonable and its data or evidence are sufficiently tied to the facts of the case, the gatekeeping role of the court is satisfied, and the inquiry on the correctness of the methodology and of the results produced thereunder belongs to the factfinder.

The particular invention at issue involves pre-processing of an image on a mobile device before uploading it to a server. In estimating a reasonably royalty, Benoit estimated that 65% of phone users regularly use the cameras to take photos; 77% of those share the photos; and 41% of those share by MMS in a way that infringes the patent. Taking the product of these percentages, Benoit found that 20% of the relevant users regularly infringe.  Taking a step back, Benoit estimated Samsung’s camera-related revenue as $14.15 per phone (calculated based upon proportional production costs) and then took the leap of concluding then that 20% of the $14.15 per phone ($2.93) is attributable to the infringement.  Thinking proportionally again, Benoit then estimated that $0.56 of every $2.93 in revenue was profit for Samsung and that – based upon a Nash Bargaining Solution, that a reasonable royalty would split that profit – or $.28 per phone in license fees. Since Samsung has distributed about 100,000,000 phones, that would add up to $29 million.

Reviewing that methodology, the Federal Circuit found:

Mr. Benoit’s damages methodology was based on reliable principles and was sufficiently tied to the facts of the case. Mr. Benoit first estimated Samsung’s economic benefit from infringement by specifically focusing on the infringing features and by valuing those infringing features based on Samsung’s own data regarding use and on its own financial reports outlining production costs and profits. Mr. Benoit then envisioned a hypothetical negotiation in which the parties would have bargained for respective shares of the economic benefit, given their respective bargaining positions and alternatives to a negotiated agreement. Mr. Benoit’s methodology was structurally sound and tied to the facts of the case.

That Mr. Benoit’s methodology was not peer-reviewed or published does not necessitate its exclusion. We recognize that the fact-based nature of Mr. Benoit’s damages testimony made it impractical, if not impossible, to subject the methods to peer review and publication. . . .  Here, the district court did not abuse its discretion in determining that Mr. Benoit’s methodology, involving the correlation of use with value, was not unreliable.

Verdict affirmed.

 

Court Maintains Laches Defense for Back Damages in Patent Cases

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by Dennis Crouch

SCA Hygiene Products v. First Baby Products (Fed. Cir. 2015) (en banc)

On en banc rehearing, the Federal Circuit has ruled that the Supreme Court’s Petrella decision (eliminating the doctrine of laches for back-damages for copyright infringement) does not directly apply in the patent context.

All eleven members of the court agreed that, in the patent context, laches continues to be available in the context blocking equitable relief such as an injunction or ongoing royalties – when warranted by the equities.  However, the court indicated (dicta here) that laches should only apply to ongoing royalties in “extraordinary circumstances.”

The 6-5 split was on whether laches can be used to eliminate back-damages for infringement that occurred within the six-year statutory limit.  Here, the majority found that laches continues to apply.

Although laches is considered a judge-made equitable doctrine, the court smartly looked to the statute in reaching its conclusion. In particular, Section 282(b)(1) of the Patent Act states that “unenforceability” is a defense to allegations of patent infringement and back when the law was passed (1952) was understood to encompass defenses such as “laches, estoppel and unclean hands.”  Taking this together, the court found that Congress meant for the laches defense to continue to work alongside the six-year limit on back-damages.

Congress remained silent on the content of the laches defense. Section 282 therefore retains the substance of the common law as it existed at the time Congress enacted the Patent Act. . . . Upon review, the case law demonstrates that, by 1952, courts consistently applied laches to preclude recovery of legal damages. Nearly every circuit recognized that laches could be a defense to legal relief prior to 1952. . . . Following a review of the relevant common law, that meaning is clear: in 1952, laches operated as a defense to legal relief. Therefore, in § 282, Congress codified a laches defense that barred recovery of legal remedies.

Challenging this point, the Dissent argued that the relevant “common law” for consideration should have come from the Supreme Court which, according to the dissent, indicated that laches was only a defense to equitable actions.

The legal history point of debate seems to be whether we should look at the general common law of laches or instead the common law of laches as applied to patent lawsuits?

Majority: If Congress looked to the common law, it likely looked to the common law of patents rather than to more general principles.”

Dissent: Patent law is governed by the same common-law principles, methods of statutory interpretation, and procedural rules as other areas of civil litigation.

With a one-judge majority, the law remains that laches is “a defense to legal relief in a patent infringement suit.”

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The majority here argues correctly that we should look to the statute and see what it tells us. That approach makes sense in all patent cases, regardless of the issue.

What the majority finds is that the statute implicitly binds the court to implement the equitable defenses available in patent cases back in 1952 (when the relevant amendment was passed). At the same time, the majority appears perfectly comfortable with the notion that the scope of the equitable actions will continue to adjust over time and were in no way fixed by their incorporation into the 1952 Act.  Thus, when the court asks – what are the contours of the laches defense – it does not feel constrained to limit itself to 1952 precedent but instead looks directly to the recent Supreme Court decision in Petrella.

Intervening Rights 2015

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R+L Carriers v. Qualcomm (Fed. Cir. 2015)

Here’s the rough timeline:

  • R+L sued Qualcomm for infringement;
  • R+L then petitioned for ex parte reexamination of its asserted patent, and that filing resulted in the asserted claims being amended and then confirmed as patentable;
  • And, before the reexam was completed, Qualcomm stopped its allegedly infringing activity.

The in the case then is whether the amendment during reexamination allows Qualcomm to entirely avoid liability for pre-reexamination acts through a doctrine known as “intervening right.”

Substantially Identical: The Patent Act provides that back-damages for pre-reexamination infringement is only available if the reexamined claims are “substantially identical” to the original claims.  This rule stems from the reissue statute, 35 U.S.C. § 252 (a reissued patent shall have the same effect as the original patent “in so far as the claims of the original and reissued patents are substantially identical”) coupled with the reexamination provision, 35 U.S.C. § 307(b) (“a reexamination proceeding will have the same effect as that specified in section 252 for reissued patents”).

The Substantially Identical test is pretty tough standard. Although it does allow for some amendment, an amended claim will basically fail if the scope of covereage is not identical. As interpreted by the courts, the “substantially identical” standard is judged objectively and it is irrelevant as to whether the patentee thought the change was substantial or not.

The changes: The patent here is directed toward a method of “transferring shipping documentation data … from a transporting vehicle to a remote processing center.”  In the original patent, R+L had failed to include the word “comprising” and instead just put a colon following the method claim preamble. In addition, the original claims included a final step of preparing “a loading manifest . . . for further transport of the package on another transporting vehicle.”  During reexamination, the patentee added the limitations that it is an “advance” loading manifest “document” for “another transport vehicle.”  In issuing the reexamination certificate, the USPTO relied upon this last change because the prior art did not include preparing “an advance loading manifest document for another transporting vehicle.”

The Federal Circuit relied upon the examiner’s statements here to interpret the claims – finding that the amendment did change the claim scope:

The examiner expressly stated he was allowing amended claim 1 because “the manifest discussed by [the prior art] is a manifest for the current shipping vehicle and not an advance loading manifest document for another transporting vehicle.”  In other words, the examiner’s focus in allowing the claims was … on the additional limitation that the advance loading manifest be “for another transporting vehicle.”  … [T]he examiner’s commentary reveals a method that would be covered by original claim 1 but not amended claim 1: the process of preparing a loading manifest “for the current shipping vehicle.”

In its briefing, R+L acknowledges that the claims were allowed over the prior art because it agreed to add the “for another transporting vehicle” limitation. As R+L stated in its interview summary during reexamination, addition of “loading manifest document for another transportation vehicle” resulted in a tentative agreement that the amendment would overcome the rejections over the prior art. … R+L clearly understood that it was limiting the scope of its claims in another way to get around the prior art.

Thus, amended claim 1 is not “substantially identical” to original claim 1 because original claim 1 encompassed scope that amended claim 1 does not. Accordingly, we conclude that amended claim 1 is not “substantially identical” to original claim 1.

As I mentioned earlier, the reasons for the amendment do not directly impact whether the amendment is substantial or not. However, the above quotation from the opinion shows how those reasons do impact the claim construction which will then impact whether the amendment is substantial.

What’s Important about This Case: The intervening rights doctrine discussed here is not new and the results are not surprising once the claims were construed.  The real element of importance of this case seems to be claim construction – and particularly, the heavy reliance placed upon the examiner’s statements during prosecution regarding the claim coverage.

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Although reexaminations are on the decline, the PTAB trials are on the rise.  Under the AIA, intervening rights will also be generated whenever a patent claim is amended in an inter partes or post grant (including CBM) review. See 35 U.S.C. § 318(c) and 328(c).

 

Dow v. Nova: “Nautilus changed the law of indefiniteness”

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By Jason Rantanen

The Dow Chemical Company v. Nova Chemicals Corporation (Fed. Cir. 2015) Download Opinion
Panel: Prost, Dyk (author), Wallach

Earlier this year in the opinion on remand in Biosig v. Nautilus, Judge Wallach rejected the argument that the Supreme Court’s opinion on the indefiniteness doctrine  “articulated a new, stricter standard.”  783 F.3d 1374, 1379 (Fed. Cir. 2015).  Instead, the Court  “modified the standard by which lower courts examine allegedly ambiguous claims; we may now steer by the bright star of ‘reasonable certainty,’ rather than the unreliable compass of ‘insoluble ambiguity.’”  Id. The thrust of Judge Wallach’s opinion was that the problem the Supreme Court saw with the Federal Circuit’s previous indefiniteness doctrine was not with the standard that the Federal Circuit was actually applying; it was that the words the Federal Circuit had been using could lead district courts astray.

Dow v. Nova presents a dramatic contrast, one that (in my view) goes a long way towards righting the boat.   Here, Judge Dyk reiterates in the strongest words since Nautilus that the Court’s opinion clearly changed the standard for indefiniteness.  There is no hint of mere Supreme clarification in this opinion, as the outcome turns entirely on whether the pre- or post-Nautilus standard applies.  Under the old standard, the result at the Federal Circuit was that the claims were definite; under the new standard, the result was that they are indefinite.  And given the purely nondeferential review applied in both cases, this pair of cases provides possibly one of the neatest examples of how a legal standard can be outcome determinative.

Background: In 2010, Dow obtained an infringement judgment against NOVA, with a jury rejecting NOVA’s indefiniteness argument.  The Federal Circuit affirmed in 2012, holding that the patents were not indefinite under its pre-Nautilus precedent.  On remand, the district court held a bench trial on supplemental damages for the period after the judgment through expiration of the patents (October 2011). While NOVA’s appeal was pending, the Supreme Court issued Nautilus.  NOVA argued that this intervening decision required the supplemental damages award to be vacated because the patents are invalid for indefiniteness.

Bars to re-litigation of indefiniteness: Nova’s challenge faced a substantial procedural hurdle, however.  Because it had litigated, and lost, its indefiniteness challenge, it would ordinarily be barred from re-litigating that issue under the doctrine of issue preclusion or law of the case.  (Claim preclusion does not apply under Federal Circuit precedent because a claim based on continuing conduct constitutes a separate claim.)     “[T]he doctrine [of law of the case] posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.”….Issue preclusion “bars ‘successive litigation of an issue of fact or law already litigated and resolved in a valid court determination essential to the prior judgment.’” Slip Op. at 11 (citations omitted).  However, “when governing law is changed by a later authoritative decision,” these two doctrines do not apply.  Id. at 12.

Nautilus and change in law: There are three requirements for the change in law exception to apply: (1) “the governing law must have been altered;” (2) “the decision sought to be reopened must have applied the old law;” and (3) “the change in law must compel a different result under the facts of the particular case.”  Slip Op. at 14-15.  Here, the court held, those requirements were met by the Nautilus opinion.  “First, there can be no serious question that Nautilus changed the law of indefiniteness. This was indeed the very purpose of the Nautilus decision.”  Slip Op. at 16.  Second, the earlier decision in Dow applied the old law:

Dow argues that our opinion in the previous appeal was not inconsistent with
Nautilus and that we did not apply the “amenable to construction” or “insolubly ambiguous standard.” But the fact that we did not include that particular language does not mean that we were not applying the prevailing legal standard. We cited Exxon, see Dow, 458 F. App’x at 917, which Nautilus specifically cited as exemplary of the rejected Federal Circuit standard…..We also explained that “the test for indefiniteness is not whether the scope of the patent claims is easy to
determine, but whether ‘the meaning of the claim is discernible, even though the task may be formidable and the conclusion may be one over which reasonable persons will disagree.’” Id. at 920 (quoting Exxon, 265 F.3d at 1375). This language corresponds exactly to the “amenable to construction” or “insolubly ambiguous” standard rejected in Nautilus.

Slip Op. at 17-18.

Third, the outcome was different under the Nautilus standard than under the pre-Nautilus caselaw.  Here, the issue was a measurement problem: which methodology should be applied to determine the “slope of strain hardening.”  “Three methods existed to determine the maximum slope, each providing, as Dow admits, “simply a different way of determining the maximum slope.”  Slip Op. at 21 (emphasis added).   None of these methods were taught in the patent, nor did it provide “any guidance as to which method should be used or even whether the possible universe of methods is limited to these four methods.”  Id. at 23.  And Dow’s expert used a fourth method, which he used after applying “only his judgment of what a person of ordinary skill would believe.”  He did not testify that one of ordinary skill in the art would choose his method over the three known methods.

Under the previous indefiniteness standard, the court observed, that Dr. Hsaio had developed a method for measuring maximum slope was sufficient.  But under the Nautilus standard, “this is no longer sufficient:

The question is whether the existence of multiple methods leading to different results without guidance in the patent or the prosecution history as to which method should be used renders the claims indefinite. Before Nautilus, a claim was not indefinite if someone skilled in the art could arrive at a method and practice that method. Exxon, 265 F.3d at 1379. In our previous opinion, relying on this standard, we held that the claims were not indefinite, holding that “the mere fact that the slope may be measured in more than one way does not make the claims of the patent invalid.” Dow, 458 F. App’x at 920. This was so because Dow’s expert Dr. Hsiao, a person skilled in the art, had developed a method for measuring maximum slope. See id. at 919–20.

Under Nautilus this is no longer sufficient.  “[A] patent is invalid for indefiniteness if its claims, read in light of the specification delineating the patent, and the prosecution history, fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention.” 134 S. Ct. at 2124; see also id. at 2129 (“[W]e read § 112, ¶ 2 to require that a patent’s claims, viewed in light of the specification and prosecution history, inform those skilled in the art about the scope of the invention with reasonable certainty.”). Here the required guidance is not provided by the claims, specification, and prosecution history.

Slip Op. at 23-24. That an expert chooses to use a particular measurement technique is insufficient for meeting the requirements of indefiniteness.  “As we held in Interval Licensing, a claim term is indefinite if it “leave[s] the skilled artisan to consult the ‘unpredictable vagaries of any one person’s opinion.’”  Slip Op. at 25.  Perhaps this could have been satisfied by expert testimony as to which methodology a person of ordinary skill in the art would have used, but that will be a question for another day.

Some more thoughts on the opinion:

  • The opinion takes pains to distinguish Biosig v. Nautilus.  In Biosig, the question was how one of ordinary skill in the art would determine what “spaced relationship” meant.  There, “we held that the prosecution history, the language of the claims, and the knowledge of one skilled in the art demonstrated that “a skilled artisan would understand the inherent parameters of the invention as provided in the intrinsic evidence” and that the claim term at issue “informs a skilled artisan with reasonable certainty of the scope of the claim.”  Dow at 25, n. 10.   One way to think about Nautilus is that it’s really about figuring out the meaning of words in the claim, whereas this case and Teva are really about how to determine whether those words, with their meaning understood, are met.
  • The weird tension about indefiniteness being a question of law but involving factual determinations remains.  Here, the issue was originally tried to a jury (probably erroneously as the Federal Circuit implied in the original Dow opinion), and the Federal Circuit’s analysis here focuses less on interpreting the text of the claims and more on identifying which measurement methodology a PHOSITA would have picked (which sounds like a factual question to me).  Regardless of this tension, I’d expect that in future cases knowledgeable counsel will make sure that there’s good support for the particular measurement methodology used by their experts, with the experts also providing support for the proposition that their methodology is the one that a PHOSITA would have used.
  • Another way to think about this case is in tandem with Wiliamson v. Citrix, in which the Federal Circuit relaxed the difficulty of invoking § 112, para. 6 when the words “means” or “step” aren’t used in the claim.  The effect of that decision was to make it riskier to use functional language in a claim when no corresponding structure is disclosed in the specification.  Dow moves in a similar direction: when no measurement methodology is described or suggested in the specification, functional limitations such as the one here may render the claim indefinite, at least when a PHOSITA would not know which of several possible methods to use.
  • Lisa Larrimore Ouellette discusses the decision on the Written Description blog as well.

Rarity: Federal Circuit Reverses Jury Verdict of Non-Obviousness

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ABT Systems and University of Central Florida v. Emerson Electric (Fed. Cir. 2015)

The patent at issue here is owned by UCF and covers a circulating fan system. U.S. Patent No. 5,547,017. Co-Plaintiff (licensee) ABT is the company started by Armin Rudd who is the named inventor on the ‘017 patent.

Prior art systems, such as the one in my house allow for the circulation fan to be left-on even when the air conditioning system is off in order to better distribute conditioned air. The improvement offered by Rudd is to turn on the fan only periodically “after a preselected time period.” That intermittent approach would save “energy and power.”

A jury found that Emmerson’s high-end “Big Blue” thermostats infringe and awarded $300,000 in damages based upon a royalty of $2.25 per unit. The jury also held that Emerson had failed to prove the claims invalid as obvious.

On appeal, the Federal Circuit has reversed – finding that the district court should have granted JMOL on obviousness.

Invalidating a Patent on Obviousness: The question of obviousness asks whether the “differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time of the invention was made to a person having ordinary skill in the art to which said subject matter pertains.” 35 U.S.C. 103(a)(pre-AIA). In KSR v. Teleflex, the Supreme Court held that a “combination of familiar elements according to known methods” that “yield[s] predictable results” is likely invalid as obvious.

Here, elements of the patented system were all known in the art as was the motivation of improving circulation at reduced cost. Likewise, one prior art reference disclosed a “single-shot” fan operation that came on one-time after a heating/cooling cycle and another disclosed period fan-only cycles at times when there was no call for heating. The question then is whether it would have been obvious to create the claimed system of periodically activating and deactivating the fan after a predetermined time following a cooling cycle. Applying KSR, the Federal Circuit found that the law requires an obviousness finding.

Commercial Success: ABT had also argued that the commercial success and long-felt need of the invention should provide enough weight to prove the invention nonobvious. Objective evidence of nonobviousness, such as commercial success, long-felt need, failure of others, copying, and unexpected results can each provide evidence for the analysis. On appeal, however, the Federal Circuit was not persuaded that ABT had proven its case. In particular, ABT did not present evidence particularly linking product commercial success to the claimed periodic fan operation. Likewise, there was no particular evidence presented that Emerson’s infringing product market was being driven in any way by the recycling feature. ABT does have a number of patent licensees that weigh in favor of nonobviousness. However, the Federal Circuit held that those licenses were insufficient to overcome the convincing case of obviousness coming from the prior art.

Holding: Patent Claims Obvious

Guest Post by Gary Griswold on Design Patent Damages

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Yesterday, the Federal Circuit summarily denied Samsung’s petition for rehearing and rehearing en banc of the high profile Apple v. Samsung decision.  (The denial was per curiam and didn’t appear on the Federal Circuit’s website, so unless you follow this case very closely you may have missed it.)  In light of that development, Samsung will almost certainly file a petition for certiorari.  Below, Gary L. Griswold, former President and Chief Intellectual Property Counsel for 3M Innovative Properties Company, offers his thoughts on design patent damages following Apple v. Samsung. 

35 USC 289 – After Apple v. Samsung, Time for a Better-Crafted Judicial Standard for Awarding “Total Profits”?

Gary L Griswold[i]

In April, I published an article, 35 USC 289 – An Important Feature of U. S. Design Patent Law: An Approach to Its Application,[ii] in the IPO Law journal. A month later, the Federal Circuit handed down its decision in Apple v Samsung. An analysis of the opinion and its ramifications by Professor Rantanen subsequently appeared on Patently-O.[iii]

Rantanen concluded, “The bottom line is that high damage claims for design patent infringement are going to be much more credible in the wake of Apple v Samsung. Under the court’s ruling, it would seem entirely possible, as a hypothetical example, for an automobile manufacture to be liable for its entire profits from a particular car model if that model contained, say, an infringing tail light. Given the publicity surrounding Apple v. Samsung, my expectation is that there will be an explosion of design patent assertions and lawsuits.”[iv]

There are troubling signs that increased assertion activity has already begun. Design patents are nearly ideal assertion vehicles given that they are inexpensive to obtain with no cost to maintain, are not published prior to grant, and have a full term of protection beginning with grant rather than filing—not to mention the § 289 damages opportunity that can include total profits of the infringer.[v]

Given the good in design patents—they operate as effective and important means for protecting innovatively designed products in the marketplace—how can this good be preserved without incurring the bad— as one example, design patents becoming the next business model for patent assertion entities (PAEs)?

In my April article, I offered a proposal for judicial implementation of § 289 that would involve the court determining “if the patented design is substantially the basis for customer demand for the entire article.” If it was, § 289 total profits damages would apply to the article; if not, total profits would not be available.

The determination would involve a binary decision, not an apportionment, in keeping with the apparent Congressional intent when § 289 and its predecessors were enacted. I noted in the April paper that the “customer demand” proposal assumes that there is a presently existing basis in § 289 for the courts to evolve a practical and useful methodology to apply a “total profits” recovery that avoids clearly unreasonable results, but at the same time captures circumstances where it is sound policy to afford a total profits option for recovery.”

The court in Apple v. Samsung,[vi] in applying § 289, apparently believed its options were limited. It stated “In reciting that an ‘infringer shall be liable to the owner to the extent of [the infringer’s] total profit’, Section 289 explicitly authorizes the award of the total profit from the article of manufacture bearing the patented design…..The clear statutory language prevents us from adopting a ‘causation’ rule as Samsung urges.” The court dismissed an early 2nd Circuit decision which limited a design patent damage award to the profits realized from the sale of a piano shell or case where the shell was sold separately from the inner workings of the piano, stating that Samsung’s smartphones were not sold separately from their shells. Id. at 27-28.

If a court were to look to adopt a workable and practical application of § 289 that would work for all types of articles of manufacture, then perhaps the customer demand proposal is a pathway to a more rationally applied § 289. It is not apportionment, so does not run afoul of the Congressional intent surrounding § 289 and its predecessors. It also avoids some clearly ludicrous results. The example of a patented tire design triggering lost profit recovery on a large agricultural combine as set out my April paper would be avoided given the irrelevancy to any likely customer of the tire design as a basis for purchase of the combine.

In this example, the same outcome, of course, could be achieved by using the separate product exception. Either way, the common sense result is preferable to what otherwise would be an overly literal application of the statute.

The separate product exception, however, has serious limitations. For example, it fails to account for a situation where an inconsequential, but patented, graphical user interface design that is not sold separately is included in an electronic device. Most thoughtful commentators would agree that § 289 profits should not normally apply to these types of relatively complex electronic devices where software features of this type are typically incidental and specifically designed for the device and, thus, are integral to it.

The same issue arises for hardware components that are designed for and integrated into a consumer end product. As an example, semiconductor manufacturers are obtaining design patents on a portion of a semiconductor. Will total profits be disgorged on the entire semiconductor? Yet more troublesome, will the electronic device into which the semiconductor is incorporated be the subject of total profits recovery under § 289? Does the outcome change if the semiconductor is an internally supplied component for the electronic device, not sold separately, versus a non-custom semiconductor that is sourced from an outside vendor? By way of comparison, if there was a utility patent on the semiconductor, would it be likely that the entire device would be subject to damages under the entire market value rule?[vii]

Another example of an exception to the literal application of 35 USC § 289 is suggested by Apple in its responsive brief to “Defendant-Appellants’ Petition for Rehearing en banc.” It states: “As the panel correctly recognized, this distinctive design was not severable from the inner workings of Samsung’s smartphones, see Op. 27-28, in the way that a cupholder is analytically distinct from the overall look-and-feel of a car.”[viii] This exception could be generalized to the situation where the design-patented element is analytically distinct from the overall look-and-feel of the device for which total profits are claimed.

These are just a few of the examples which have and will surface that argue against a literal application of 35 USC § 289. What can be done?

The court in Apple v. Samsung said “policy arguments that should be directed to Congress. We are bound by what the statute says, irrespective of policy arguments that may be made against it.”[ix] Ct. Opinion at 27, fn. 1. But courts have acted or provided guidance in other instances where easily foreseeable outcomes of literal application of a statute would be unreasonable. The entire market value rule is a prime example where a literal approach could have been surfaced as a reason to deny damages for activity beyond the patent scope but within the patented invention’s influence.

Unfortunately, without a course correction we are likely headed for the explosion Professor Rantanen predicts. As noted, for example, we can expect PAE business models to adapt to new opportunities presented by the courts. The result could take design patents way beyond their intended purpose of stimulating invention. In the end, this will likely bring forward efforts to repeal § 289. This would deny a fair and reasonable remedy for those who invent new designs that are substantially the basis of customer demand. Hopefully, a judicial framework will be developed that strikes the right balance and further secures § 289 as a distinguishing feature of U.S. design patent law.

[i] Mr. Griswold is a Consultant residing in Hudson, WI and was formerly President and Chief Intellectual Property Counsel for 3M Innovative Properties Company. The paper reflects the views of the author. He wishes to thank Bob Armitage and Mike Kirk for their excellent contributions to the paper.

[ii] Gary L. Griswold, 35 USC § 289 – An Important Feature of U.S. Design Patent Law: An Approach to Its Application. IPO Law Journal, (April 6, 2015). http://www.ipo.org/wp-content/uploads/2015/04/griswold_an-approach.pdf

[iii] Rantanen, Jason, “Apple v. Samsung: Design Patents Win.” Patently-O. (May 18, 2015) https://patentlyo.com/patent/2015/05/samsung-design-patents.html

[iv] Id.

[v] Marcus, David and Shawn Leppo, “Welcome Fallout from the Smartphone Wars: Federal Circuit embraces strong protection of design patents.” Metropolitan Corporate Counsel. (July 17, 2015). http://www.metrocorpcounsel.com/articles/32603/welcome-fallout-smartphone-wars-federal-circuit-embraces-strong-protection-design-pat?utm_source=mccreview+Upload+20150106&utm_campaign=58fe4b6614-MCC_Review_07_22_20157_21_2015&utm_medium=email&utm_term=0_4624ea9f3a-58fe4b6614-236350701

[vi] Apple v. Samsung, Case No. 2014-1335; 2015-1029 (Fed. Cir. May 18, 2015). http://www.cafc.uscourts.gov/sites/default/files/opinions-orders/14-1335.Opinion.5-14-2015.1.PDF

[vii] The impact on suppliers, manufacturers and retailers will be significant. Who will take the risk of this exposure, the supplier through an indemnity agreement who did not receive the profit on the article, the manufacturer who will need to assess the exposure for each component, or the retailer (for its profit) who sells the final product?

[viii] See Brief in Opp’n to Rhg, Apple v. Samsung, Case No. 2014-1335; 2015-1029 at 27-28 (Fed. Cir. July 20, 2015)

[ix] Apple v. Samsung, Ct. Opinion at 27, fn. 1.

Peter Menell’s Patent Litigation Guide

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Professor Peter Menell is very much a practical consensus builder and his collaborative Patent Case Management Judicial Guide has gone a long way in seting a gold standard in how a Judge should manage patent cases (and thus how parties should litigate patent cases).

The 1,300 page third edition has just been released and is available for free on SSRN with the following abstract:

This treatise updates and expands upon the second edition of the Patent Case Management Judicial Guide (2012). Since that time, patent litigation has continued to increase in complexity. This edition encompasses implementation of the America Invents Act (“AIA”), the emergence of review proceedings at the Patent Trial and Appeal Board (“PTAB”), the Supreme Court’s many recent patent decisions (patent eligibility, claim construction, claim indefiniteness, infringement analysis (rejecting “joint infringement”), the intent requirement for induced infringement liability (rejecting a defense of good faith belief of a patent’s invalidity), and attorney fees), and the Federal Circuit’s damages jurisprudence (including damage awards for standard essential patents (SEP) licensed pursuant to fair, reasonable, and nondiscriminatory (FRAND) terms. It also includes case management checklists, model case management orders, and other materials developed by district judges and advisory bodies for streamlining patent case management. Finally, this volume adds a chapter on patent litigation at the Court of Federal Claims.

http://ssrn.com/abstract=2637605. Menell’s team of co-authors includes Lynn Pasahow (Fenwick); Jim Pooley (Pooley); Matthew Powers (Tensegrity); Steven Carlson (Kasowitz Benson); Jeffrey Homrig (Latham); George Pappas (Covington); Carolyn Chang (Fenwick); Colette Mayer (Morrison Foerster); and Marc Peters (Morrison Foerster).

Marvell v. Carnegie Mellon: $300 million is a lot, but not $1.5 billion

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The Federal Circuit has greatly reduced the $1.5 Billion award to Carnegie Mellon University — leaving a still healthy $278 million to be paid by chip manufacturer Marvell Technology (plus interest) with the potential of additional receipts from a new trial on whether foreign sales are actually US sales. [Read the Decision]

1. Willful Infringement: A portion of the original damage award (~20%) in this case came from enhanced damages.  The statute provides that “the court may increase the damages up to three times the amount found or assessed.”  Although seemingly open-ended, the court has restricted enhanced damages only to the situations involving willful infringement — and further requiring “clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” and “this objectively-defined risk . . . was either known or so obvious that it should have been known.” (quoting Seagate).

The Federal Circuit has ruled that an adjudged infringer who presents an objectively reasonable (though ultimately deficient) defense at trial cannot be held liable for enhanced damages.  Here, the court found that Marvell’s invalidity defense had some merit and was not ‘objectively unreasonable.’

2. Foreign Infringement: The original verdict included damages for all of the chips that resulted from Marvell’s use of the infringing methods sold worldwide – including chips that were manufactured abroad and never imported into the US.  On remand, the Federal Circuit asked the lower court to reconsider particularly whether those chips made and used outside of the US could be considered as “sold” in the U.S. since, at times, the “place of inking” can be the location of the sale even if delivery is at a different location.

3. Laches: Under the equitable doctrine of laches, a patentee who has unreasonably and prejudicially delayed the filing of an infringement lawsuit will be barred from collecting damages for pre-filing infringement.  The non-statutory (and potentially defunct) doctrine of Laches sits atop the statutory limit on collecting back damages that accrued more than six years before the filing of the infringement action.  Here, the district court found that CMU’s six-year delay in filing suit after noticing the infringement was “unreasonable and inexcusable” and that Marvell had suffered some amount of evidentiary prejudice.  However, the district court found that Marvell did not suffer economic prejudice due to the delay because, “Marvell . . . would have gone ahead with its infringement regardless, accepting the risk of liability.”

RAND Agreement Proving Powerful Limit on Patentee Action: Microsoft v. Motorola

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Microsoft v. Motorola and Google (9th Cir. 2015)

In a well written decision, the 9th Circuit has affirmed the lower court ruling that Motorola/Google owes $14 million to Microsoft for failing to live-up to its RAND commitments.   Although Motorola (now Google) committed several WiFi-essential patents to Reasonable and Non-Discriminatory (RAND) licensing, it later demanded that Microsoft pay a hefty royalty rate lest it be blocked from using WiFi.  Those demands from Motorola should more properly be seen as a counter-offensive  prompted by Microsoft’s demands for royalties on every Android implementation.

The basic rulings: (1) affirming that Motorola had breached its RAND good faith and fair dealing obligations in its dealings with the third-party-beneficiary Microsoft – resulting in $14.5 million in damages; (2) affirming that the district court had not erred in determining the RAND royalty rate at a few cents per device (rather than the few dollars per device requested by Motorola).  The court previously agreed to hear the case (rather than the Federal Circuit) and that prior finding was left undisturbed based upon the “law of the case.”

The damages here are interesting.

Motorola had challenged the district court’s RAND royalty determination as failing to follow Federal Circuit damages precedent.  On appeal, the 9th Circuit held that neither Federal Circuit precedent nor the Patent Act requirement of “a reasonable royalty” floor control because the RAND rate is a contract obligation rather than a patent damage.  That said, the 9th Circuit did agree that the Georgia-Pacific factors are helpful in guiding the analysis.

The $14 million breach-of-contract damages actually stemmed from Motorola’s infringement action filed in Germany.  When that lawsuit was filed, Microsoft quickly relocated its infringing European distribution center to the Netherlands (at a cost of several million dollars).  The German court did grant an injunction against Microsoft’s ongoing infringement in Germany.  Back in the U.S. the district court determined that the German action (and demand for injunctive relief) was a breach of Motorola’s RAND agreement and awarded Microsoft $11 million to compensate for moving its distribution center and $3 million in attorney fees for having to fight the legal battle in Germany.  Those findings have now been affirmed by the 9th Circuit.

Motorola  argued that the U.S. policy of open access to the courts should bar liability for consequential damages associated with filing a lawsuit.  That argument is embodied by the Noerr-Pennington doctrine that shields parties from liability for simply engaging in litigation.  Here, however, the 9th Circuit found the doctrine inapplicable when contractual obligations bar certain litigation strategies — here, in particular, the RAND agreement was seen as barring any request for injunctive relief.

Overall, the outcome provides power to RAND/FRAND agreements – proving that they provide significant assurances to third parties on a global scale.

 

 

 

 

Fee Shifting as Patent Policy Lever: How to Ensure Sufficient Torque

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Guest Post by Professor Shubha Ghosh, University of Wisconsin Law School

Congratualtions to Hannah Jiam for her great work on attorney’s fee shifting after the Supreme Court’s 2014 Octane Fitness and Highmark decisions! The forthcoming article provides a deep portrait of how attorneys have responded to the new regime under Section 285 and how courts have ruled.  She also makes an insightful observation about the role of judicial discretion and the need for legislative reform of Section 285 to provide more detailed guidance for judges in order to direct and focus their discretion. Many scholars speak about attorney’s fees as a policy lever to limit frivolous litigation and the questionable practices of NPE’s. What I learned from Hannah’s article is that we also need to consider the torque of any particular policy lever (to take the nerdy techno-metaphor to the next level).

I have been pursuing research on Section 285 during my leave year from the University of Wisconsin as an AAAS Law, Science, and Policy Fellow at the Federal Judicial Center in Washington, DC. A completed paper summarizing my research will be available in a few months. Here, I would like to present some preliminary findings in order to complement Ms. Jiam’s work.

Where my methodology differs is to focus on the regimes pre-Octane Fitness as well as decisions after 2014. I am examining published judicial opinions ruling on 285 motions over three periods: (1) from the founding of the Federal Circuit in 1982 to the Brooks Furniture decision in the first week of 2005; (2) from 2005 to the Octane Fitness decision in 2014; and (3) from 2014 to the present. While there are methodological problems in looking at published opinions (which I address at the end of this post), looking at what courts have done and said with regards to 285 motions offers useful information on when courts have found a case to be exceptional and when not.

My principal finding is that judicial discretion matters regardless of the stated standard for the award of attorney’s fees.  In other words, raising the standard, as occurred with Brooks Furniture, or lowering the standard, as occurred with Octane Fitness, may not matter over all as to how courts exercise their discretion. The tentative implication is that the torque of attorney’s fees as policy levers depends on an articulation of what factors courts are required to use in awarding fees and perhaps ultimately on whether or not the fees are automatic.

Some preliminary findings from various data sources illustrate these points.  Table 1 reports findings from Lex Machina, which reports on various patent litigation events starting in 2000.  The database captures awards of attorney’s fees across jurisdictions.  Unfortunately, the database, when examined in March, 2015, did not report denials.  Nonetheless, consideration of the three periods for my study, we can see an above average of attorney’s fees awards per year during the Brooks Furniture period (from 2005 to 2014).  The relative size of this number, as compared to the pre-Brooks Furniture period, may be surprising since Brooks Furniture presumably made it more difficult to obtain attorney’s fees. The magnitude is most likely the result of increased patent litigation during this period, as reported by other scholars.  More careful study of the types of cases arsing during the Brooks Furniture period would explain the larger annual award rate by the district courts.

Terminated cases with award Yrs Cases/yr
Period 1 (2000-2005) 113 5 22.6
Period 2 (2005-2014) 292 9.33 31.29
Period 3 (2014-2015) 24 .9 26.67
TOTAL 429 15.23 28.17

TABLE 1: Lex Machina data on awarded attorney’s fees from 2000 to the present

Looking more closely at the 24 identified awards of attorney’s fees post-Octane, 17 of these cases involved awards to patent owners while 7 were awards to the alleged infringer (who of course prevailed at trial). Of the 17 cases in which the patent owner obtained attorney’s fees, 4 were default judgment cases and a different 4 also involved the award of enhanced damages. The last finding suggests that fees are awarded in cases that would not meet the standard for willful infringement.

One way to obtain a sense of types of cases is to look at the time towards final judgment from initial filing, what is reported in Lex Machina as “time to terminate.”  Of the 7 cases in which the alleged infringer obtained attorneys’s fees, 5 were cases with above average time to terminate, meaning cases that were initiated sometime before the Octane Fitness decision. Of the 17 cases in which the patent owner received fees, 8 involved above average time to terminate. If cases with longer times to terminate are viewed as more contentious cases, it seems that cases in which alleged infringers prevail on fee shifting are more contentious than the cases in which the patent owner prevails on fees.

The main limitations with respect to the Lex Machina data are the selection effects that arise with respect to examining reported cases and the exclusion of fee denials.  Nonetheless, even looking solely at instances of attorney fee awards, there does not seem to be a pro-defendant orientation in judicial decisions. But to fully understand whether Octane Fitness serves as an effective policy lever to control frivolous patent litigation, we need to compare the post-Octane world with the regimes that existed before.

Below, I provide some preliminary summary statistics about the denial and grant of attorney’s fees over three periods from 1982 to the present.  These three periods are divided into the pre-Brooks Furniture regime (1982-2004); the Brooks Furniture regime (2005-2014); and the Octane Fitness regime (2014 to the present). The following results are based on reported decisions in Westlaw on 285 motions.  The decisions include both grants and denials. I conducted the search of these cases in early January. I am currently working on updating the searches and expanding the coding of the cases for various factors pertinent to understanding what constitutes an exceptional case. I should emphasize that what I am presenting is still preliminary. But I believe there is enough here for discussion especially in light of Ms. Jiam’s study.

My Westlaw search identified 24 reported decisions on attorney’s fees post-Octane, 205 reported cases from the Brooks Furniture regime, and 147 from the period between the formation of the Federal Circuit and the Brooks Furniture ruling.  I examined a random sample of 20% of the cases from the Brooks Furniture regime and 16% from the pre-Brooks regime.  These two random samples provide the basis for the statistics presented below.

Table 2  reports on the 24 reported cases post-Octane. Of these 24 cases, 12 resulted in grants and 12 in denials. Of the 12 grants, 9 went to the non-patentee as prevailing party. This may suggest that non-patentees are more successful post-Octane in obtaining attorney’s fees awards. But what must also be taken into consideration is that the 12 denials of awards all were in cases where the non-patentee’s motion was denied by the court. Just to be clear, these denials involved cases in which the non-patentee was the prevailing party but the court determined that the case was not exceptional. Unlike the Lex Machina data, the Westlaw reported cases capture both grants and denials. The denials are important to take into consideration in examining the effectiveness of section 285 as a policy lever. To highlight this point, consider the following. Of all the 24 reported cases involving fee shifting, 21 involved motions from the non-patentee. The disproportionate number of non-patentee motions would suggest that the Octane Fitness regime might be more favorable to the non-patentee.  But of these 21 motions, only 9 resulted in a grant, suggesting that the motions were successful in less than half the cases, as reported in Westlaw.  On the other hand, patent owners had a 100 % success rates based on the 3 reported cases involving a motion brought by the owner.

n Patentee Nonpatentee Infringement Declaratory  Judgment
Grant 12 3 9 11 1
Deny 12 0 12 10 2
 TOTAL  24 3 21 21 3

Table 2: Attorney fee awards reported decisions post-Octane

How the litigation environment has changed under the Octane Fitness decision requires comparison with the world before hand.  Tables 3 and 4 report similar statistics for the pre-Brooks and Brooks regimes, although based on random samples from the respective population of cases.

 n Patentee Nonpatentee Infringement DJ
Grant 9 2 7 7 2
Deny 15 6 9 13 2
 TOTAL 24 8 16 20 4

Table 3: pre-Brooks reported cases. Total=147. N=24 (16% random sample) 

n  Patentee Nonpatentee Infringement DJ
Grant 12 4 8 12 0
Deny 28 10 18 24 4
 TOTAL  40 14 26 36 4

Table 4: Brooks Furniture reported cases. Total=205. N=40 (20% random sample)

These two tables are based on random samples from the population of cases and hence are very preliminary.  Nonetheless they raise some hypotheses to examine in considering the entire population of cases.

The first point to emphasize once again is that denials need to be taken into consideration in gauging the effectiveness of a particular attorney’s fees regime. Under the pre-Brooks regime, there were about 62 % denials among the reported cases ruling on attorney’s fees. By comparison, there were 70 % denials among the reported cases ruling on attorney’s fees during the Brooks Furniture regime.  Since the Brooks decision raised the standard for the award of attorney’s fees, it is not surprising that the denial rate is higher. But perhaps surprisingly, the rate may not be significantly higher (I have not done this test yet).

Furthermore, even though reported cases deal with motions from nonpatentees more frequently than motions from patent owners, nonpatentees are more likely to be denied fees under both the the pre-Brooks and Brooks regimes. Nonpatentees had a 44%  grant rate under the pre-Brooks regime and a 31 % grant rate under Brooks. By comparison, patentees had a 25% grant rate pre-Brooks and a 28% grant rate under Brooks.

Once again, the various statistical tests of significance have not been applied yet to provide a full interpretation of these data. But two points are important at this stage of the research.  In order to understand the effectiveness of Octane Fitness (its torque), we need to understand what the world of attorney’s fees looked like before the 2014 decision.  Furthermore, we need to examine how grants and denials are awarded between patentees and nonpatentees. What the data suggest so far is that the various standards, however characterized as easy or hard, do not seem to favor one side over the other in patent litigation. To me, this suggest that judicial discretion may be working around the articulated standards to make decisions on a case by case basis. Part of the research is to determine what courts articulate as the relevant standard.

Table 5 partially addresses the big question of what courts deem to be exceptional cases. The table reports frequently used phrases across the various regimes in the published opinions.

RATIONALES Grant Denial
Pre-Brooks Furniture “dilatory tactics”; “inequitable conduct”; “willfulness”; “failure to investigate”; “fraud on USPTO” “no intent to deceive”; “no willfulness”; “no vexatious litigation”; failure to meet burden
Brooks Furniture “vexatious litigation”; “misconduct in USPTO”; “bad faith”; “obj and subj baseless in light of claim construction” failure to meet burden; “no willfulness”; “no misconduct”
Post-Octane litigation misconduct; discovery abuse; relitigating arguments; “lit theory inconsisitent with claim construction”; uncivil tacticsnuisance suit; Fogerty factors No misconduct; Reasonable tactics; No bad faith

Table 5: What courts say and do 

An advantage of examining reproted cases, despite the limitations, is the ability to discern what courts are thinking in granting or denying fees. Let me focus on a few highlights here given my space restrictions.  First, notice the prevalence of identified misconduct by the patentee or nonpatentee and attorneys as a basis for granting awards. Second, notice the prevalence of failure to meet the burden of proof in denying awards under the Brooks Furniture standard. Finally, notice the discussion of willfulness across the various regimes indicating that the determination of awarding fees occurs in the broader context of inequitable conduct and enhanced damages. My main conclusion from reading and assessing these cases is that courts seemingly exercise their discretion in determining what constitutes an exceptional case in similar ways despite the stated standard for granting fees. The policy prescription would be that the torque from using fee shifting as a policy lever may be dampened by judicial discretion. Whether legislative reform should cabin such discretion is at the core of how effective and politically feasible such reform would be.

One last word about my methodology.  There are obvious selection effects from examining reported cases as I have done here. These selection effects are also relevant for Hannah’s article. Reported cases are not the typical case. Although we need to consult reported cases to determine what courts consider “exceptional,” we need to keep in mind that the reported cases are not representative of the population of cases that fee shifting rules are supposed to regulate.  One goal of fee shifting rules is to prevent frivolous litigation and specifically extracted settlements based on frivolous claims. The effect of fee shifting on settlement is a complex one. Assuming that frivolous cases can be precisely identified by a judge, patent owners may be less willing to bring frivolous cases. At the same time, nonpatentees may be less willing to settle all cases, particularly frivolous ones. Looking solely at reported cases does not allow a researcher to determine how effective a fee shifting regime is in controlling frivolous litigation and settlement. Therefore, we should be wary of making global conclusions from looking at reported cases.  Nonetheless, the summary statistics I provide here, in conjunction with Ms. Jiam’s excellent work on post-Octane developments, shed some light on a critical aspect of the patent reform debate.

Apple v. Samsung: Design Patents Win

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By Jason Rantanen

Apple Inc. v. Samsung Electronics Co., Ltd. (Fed. Cir. 2015) Download Opinion
Panel: Prost (author), O’Malley, Chen

Apple prevailed at the district court on trade dress, design patent and utility patent claims, with a total award of almost a billion dollars.  On appeal, the Federal Circuit reversed on trade dress but affirmed on the design and utility patents.  The big winner in this case, though, are design patents: the Federal Circuit rejected Samsung’s attempt to exclude functional features from the infringement analysis and affirmed the district court’s award of Samsung’s total profits from the sale of the phones with the infringing design.

Trade Dress: Samsung challenged Apple’s unregistered and registered trade dresses on the ground that they were functional.  Applying the Ninth Circuit’s law on Lanham Act claims, the Federal Circuit agreed that Apple’s asserted trade dresses possessed utilitarian functionality.  In reaching this conclusion, it placed particular weight on the “product configuration” nature of the trade dress.    “[C]ourts have noted that it is, and should be, more difficult to claim product configuration trade dress than other forms of trade dress.” Slip Op. at 8, quoting Leatherman Tool Grp., Inc. v. Cooper Indus., Inc., 199 F.3d 1009, 1011-12 (9th Cir. 1999).  Here, all factors weighed in favor of the trade dresses being functional and thus unprotectable under trademark law.

Design Patents: A substantial portion of Apple’s billion dollar verdict were based on the infringement of its design patents and  Samsung attacked that issue with an array of arguments.  The Federal Circuit rejected all of them.

Functionality and infringement: Samsung argued that “the district court erred in failing to exclude the functional aspects of the design patents either in the claim construction or elsewhere in the infringement jury instructions.”  Slip Op. at 20.  “For example, Samsung contends that rectangular form and rounded corners are among such elements that should be ignored in the infringement analysis.”  Id.  But, the court held, the precedent cited by Samsung did not support a rule “to eliminate elements from the claim scope of a valid patent in analyzing infringement.”  Id. at 21  Nor did the district court err in its construction of the patent: the principle that “it is the non-functional, design aspects that are pertinent to determinations of infringement” was properly reflected in “the district court’s construction
of the design patents as claiming only ‘the ornamental design’ as shown in the patent figures.”  Id.

Actual deception not required and the role of prior art: In its instruction on infringement, the district court stated: “You do not need, however, to find that any purchasers actually were deceived or confused by the appearance of the accused Samsung products.”  Samsung argued that this instruction misled the jury; the Federal Circuit disagreed. “[T]he jury instruction simply clarified that actual deception was not required, which is an accurate reflection of the analysis in Gorham.”  Id. at 23.  Nor did the jury instructions reduce the consideration of the prior art to a mere option.

Samsung also argued that infringement was not supported by substantial evidence, but its substantive arguments were essentially the same as its challenges to the jury instructions.  The court rejected these and Samsung’s argument that the district court abused its discretion in precluding certain testimony.

Damages: This is the section of the opinion that will probably get the most attention.  The damages statute for design patent infringement, 35 U.S.C. § 289 states:

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 other words, “Section 289 explicitly authorizes the award of total profit from the article of manufacture bearing the patented design.”  Slip Op. at 25 (emphasis added).  That is, Samsung’s total profit from its sales of phones with the infringing designs.

Samsung raised two primary arguments.  First, it argued in favor of apportionment based on a causality theory; that is, that the only profits attributable to the infringement be allowable as damages.  But the statute says “total profit,” and the statutory history contained an express removal of a prior apportionment requirement in the Act of 1887.  Second, Samsung argued that the “article of manufacture” should be limited to the infringing “article of manufacture” and not the entire infringing product.  Again, the Federal Circuit disagreed, distinguishing Samsung’s citation to a 1957 Second Circuit case involving pianos and piano cases.  The Federal Circuit did not substantively engage with the statutory language on this issue.

The bottom line is that high damages claims for design patent infringement are going to be much more credible in the wake of Apple v. Samsung.  Under the court’s ruling, it would seem entirely possible, as a hypothetical example, for an automobile manufacturer to be liable for its entire profits from a particular car model if that model contained, say, an infringing tail light.  Given the publicity surrounding Apple v. Samsung, my expectation is that there will be explosion of design patent assertions and lawsuits.

Utility Patents: Samsung raised an indefiniteness argument based on the claim term “substantially centered;” unsurprisingly, the Federal Circuit rejected it.  There is one interesting little nugget, though: Samsung lost because it “points to no evidence showing that skilled artisans would find the element ‘substantially centered’ as lacking reasonable certainty in its scope.”  Slip Op. at 29.  This language is notable because it reflects the court’s waffling between indefiniteness as an evidentiary question and indefiniteness as question of law.  The former expressly involves testimony about what one of skill in the art would understand; the latter is a question for the court.

Utility Patent Damages: Lost profits for utility patent infringement does require a showing of causality and Samsung argued that there was an acceptable noninfringing substitute.  But “the ‘[m]ere existence of a competing device does not make that device an acceptable substitute.’” Id. at 31, quoting precedent.  All Samsung pointed to was the “mere existence” of a noninfringing phone.  This was not enough, and “there was substantial evidence to support the jury’s refusal to consider the two phones asserted by Samsung as non-infringing substitutes.”  Id. at 32.    The Federal Circuit also rejected Samsung’s challenges to the reasonable royalty award on the set of phones for which Apple was not entitled to lost profits.

Hat tip to Tom Cotter for being the first to alert me to the opinion, which initially appeared only on PACER.  His writeup of the damages discussion: http://comparativepatentremedies.blogspot.com/2015/05/federal-circuit-affirms-damages-awards.html.