Determining 'Damages Adequate to Compensate for the Infringement'download.pli.edu/WebContent/pm/186789/pdf/04-28-17_1000... · 2017-04-25 · Determining "Damages Adequate to Compensate

Determining "Damages Adequate to Compensate for the Infringement" 11th Annual Patent Law Institute – 2017

The views expressed in this presentation are solely those of the presenter and should not be attributed to the author’s firm, its other professionals, or to any of the presenter’s clients.

Drew Mooney

Scott Oliver

Recent Trends in Patent Damages

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Apple v. Samsung

Halo v. Pulse

Prism v. Sprint

Notable District Court Decisions

• Article of manufacture may be a component

• Two part test to damages

• Loosened the standard for awarding enhanced damages in patent cases

• Preponderance of the evidence ~ instead of clear and convincing

• Thorough analysis by expert satisfies gatekeeper role

• Georgia-Pacific factors

• Evidence sufficiently tied to the facts

Supreme Court Weighs in on Design Patents Samsung v. Apple Samsung Elecs. Co. v. Apple Inc., 137 S. Ct. 429, 434 (2016):

35 U.S. Code Section 289

• 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.

Damages Remedy for Design Patent Infringement

Samsung v. Apple Supreme Court (2016)

Article of Manufacture May Be a Component


Article of Manufacture is Broad Enough to Embrace a Component


Damages under § 289 ~ The Two Part Test


Damages under § 289 ~ The Two Part Test

Arriving at a damages award under §289 thus involves two steps:

• “First, identify the ‘article of manufacture’ to which the infringed design has been applied.

• “Second, calculate the infringer's total profit made on that article of manufacture.”


Step 1: Identifying the Article of Manufacture

• “We decline to lay out a test for the first step of the §289 damages inquiry in the absence of adequate briefing by the parties.”

• “Doing so is not necessary to resolve the question presented in this case, and the Federal Circuit may address any remaining issues on remand.”

Samsung Elecs. Co. v. Apple Inc., 137 S. Ct. 429, 436 (2016)

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Step 1: Various Tests Proposed from Amicus Briefs

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Test proposed by the U.S. Government as Amicus Curiae

• “. . . the factfinder’s over-arching objective should be to identify the article that most fairly may be said to embody the defendant’s appropriation of the plaintiff’s innovation. . . .

• “In determining whether the relevant article is the entire product or a component, the factfinder therefore should keep in mind the scope of the plaintiff ’s innovation and should identify the article in which the patented design prominently features, without unnecessarily sweeping in aspects of the product that are unrelated to that design. . . .

• “The ‘article of manufacture’ inquiry entails a case-specific examination of the relationship among the design, any relevant components, and the product as a whole.”

• Four factors in particular may be relevant.

1. The scope of the design claimed in the plaintiff’s patent.

2. The relative prominence of the design within the product as a whole.

3. Whether the design is conceptually distinct from the product as a whole.

4. The physical relationship between the patented design and the rest of the product. That is,

• Does the design pertain to a component that is physically separable?

• Is the design embodied in a component that is manufactured or sold separately?



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Nordock’s Amicus Brief: Nordock’s amicus brief agreed with the Government’s four factors but proposed several additional ones:

• The degree to which the defendant’s marketing displays the component bearing the patented design.

• Defendant’s knowledge of the component design when it was developing its product.

• Whether the component is commonly sold separately.

• The importance of the component to the primary purpose of the article.

• Whether the USPTO lists the classification number for the product as a search field, or only lists the class for the component.

• Whether the USPTO has a design class for the infringing product and the design patent lists the classification for the product.

• Whether the references listed on the cover of the design patent predominantly list patents for an entire product.

• Defendant’s attempt to hide its infringing activities.

• Defendant’s relative dominance and duration in the industry.



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Internet Ass’n Amicus Brief:

• “. . . where the application of the design permeates the entire product and drives nearly all of its demand . . . the ‘article of manufacture’ is the whole product . . . .

• “But where a design ‘has been applied’ to only part of a multicomponent product and does not drive demand for the entire product, the ‘article of manufacture’ is rightly considered to be only the component to which the design applies, and only profit attributable to that component may be awarded.”

Other Proposed Tests:

• Other amici critiqued the Government’s proposed test as too “amorphous and indeterminate,” offering “no guidance on how these ‘considerations’ should be weighed” (Design Professionals Brief);

• As “impractical” and costly (Crocs Brief);

• As contradictory, in that it in effect would permit courts “to engage in case-by-case apportionment under a new name” (Professor Janis Brief).

• At oral argument:

• Samsung’s counsel proposed “you look to two factors: The design in the patent and the accused product” (transcript p. 20).

• Apple’s counsel accepted the U.S. Government’s proposed four factors but would add others, “most importantly the identity of what it is that is typically consumed by purchasers. Whether the patented design is likely to cause consumers to purchase the infringing product thinking it to be the patentee’s product” (transcript pp. 39-40) (emphasis added).


Step 1: The parties’ proposed tests for identifying the article of manufacture


Step 2: Calculations of Infringer's Total Profit Made on the Article of Manufacture

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Not discussed in the briefs. However, at oral argument:

Apple suggested considering the profit margin on the sale of the entire product and the cost of producing the component/article of manufacture (transcript p.46).

Samsung suggested considering the cost to produce and the profit margin on the entire device, and the extent to which the design contributes to the demand for the product (transcript pp. 9-15).


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Other issues: Is This Really a Jury Issue?

Apple and the U.S. Government contend it is a jury issue:

• Apple’s Supreme Court Brief (p.35): “where the identity of the article of manufacture is genuinely disputed, the matter is a question of fact to be decided by the jury.”

• Government Brief (p.29): “The task of identifying the relevant article of manufacture is properly assigned to the finder of fact.”

However, is disgorgement of profits an equitable remedy for which there is no right to trial by jury?


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What’s Next?

Systems Inc. and Nordock Inc.

• In December 2016, the U.S. Supreme Court sent this design patent dispute over a loading dock patent back to the Federal Circuit so the lower court can reassess in light of the high court’s recent Samsung v. Apple case.

• In March 2017, The Federal Circuit deemed a new jury trial was necessary to determine whether Systems owes royalties on a loading dock ramp or just a component of the end product. The jury will accordingly calculate the appropriate amount of damages from there.

• Chance to restructure jury instructions

• Develop the record regarding what constitutes the relevant “article of manufacture”

Apple v. Samsung

• In Feb 2017, the Federal Circuit sent the dispute back to the ND of CA leaving it to the lower court to determine how to apply a recent U.S. Supreme Court decision (how design patent damages should be calculated) vacating the nearly $400 million damages award won by Apple.


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Will the Fed. Circ. Look to Prior Guidance on Damages for Utility Patents to Determine Total Profits from “Article of Manufacture”

Over the past several years, the Federal Circuit has taken steps to clarify prior precedent regarding the entitlement to reasonable royalty damages and under the Entire Market Value Rule (“EMVR”).

• In 2009, the Federal Circuit, in Lucent Technologies v. Gateway, held that there must be “evidence demonstrating the patented method. . . [was] the basis – or even a substantial basis – of the customer demand” for the product.

• In 2009 Cornell University v. Hewlett Packard Company (ND NY, Judge Rader by designation) 2009, Judge Rader excluded base as plaintiff did not meet EMV requirements suggesting the use of econometric studies, customer surveys, regression analysis or other marketplace-wide evidence of demand sensitivities to satisfy this requirement.

• In its 2011 decision in Uniloc USA v. Microsoft Corp.,* the court held that the use of total profits as a basis for determining a royalty rate is only appropriate when the patent directly contributes to the infringer’s profits.


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• In 2011, the E.D. Va in Rolls-Royce PLC v. United Techs. Corp., granted defendant’s motion in limine to exclude evidence of lost profits based on the entire market value rule because the plaintiffs proposed damages were based on the sales of the entire product at issue, a jet engine, even though the patent at issue covered only the fan blade, one of thousands of components in the engine, and plaintiff did not provide any evidence showing that the fan blade was the basis for consumer demand for the engine

• In its 2014 decision in LaserDynamics, Inc. v. Quanta Computers , the Fed. Circ. ruled whether “viewed as valuable, important, or even essential,” the patented feature must be separated. Where parties cannot rely on the entire market value rule, “it is generally required that royalties be based not on the entire product, but instead on the ‘smallest salable patent-practicing unit.’”


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• Also in 2014, Federal Circuit held in VirnetX Inc. v. Apple, Inc. that the EMVR jury instruction inappropriately created a second exception that would allow a patentee to rely on the entire market value of a multicomponent product so long as that product is the smallest salable unit containing the patented feature.

• “[T]he requirement that a patentee identify damages associated with the smallest salable patent-practicing unit is simply a step toward meeting the requirement of apportionment. Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature (as VirnetX claims it was here), the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology. To hold otherwise would permit the entire market value exception to swallow the rule of apportionment.”

Supreme Court Weighs in on Enhanced Damages Halo v. Pulse Halo Elecs., Inc. v. Pulse Elecs., Inc., 136 S. Ct. 1923, 1926 (2016)

35 U.S. Code § 284 - Damages

“the court may increase the damages up to three times the amount found or assessed”

Enhanced Damages in Patent Infringement Cases

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Halo v. Pulse Supreme Court (2016)

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Supreme Court Comments on Enhanced Damages

In Seagate (Fed. Circ. 2007), the Fed. Circ. held that enhanced damages could be awarded only when a court found the infringement willful, setting a two-part test that patent owners must meet.

• First, they must show there was a high likelihood that the infringer’s actions infringed

• Second, that the infringer knew of that risk.

The Supreme Court examined the issue of enhanced damages in 2016, finding that the two-part test established by Seagate was not consistent with Section 284.

• When faced with such deliberate wrongdoing, “it is not clear why an independent showing of objective recklessness – by clear and convincing evidence, no less – should be a prerequisite to enhanced damages” and took further issue with the required “clear and convincing evidence.”

• The Supreme Court stated that “Section 284 permits district courts to exercise their discretion in a manner free from the inelastic constraints of the Seagate test”


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Halo Electronics Inc. v. Pulse Electronics, et. al. (Case No. 14-1513)

• Halo won a $1.5 million jury verdict against Pulse in a case over transformer patents

• Jury found that it was highly probably that Pulse willfully infringed

• District judge ruled that Halo failed to meet the Seagate test and refused to award enhanced damages since Pulse presented an obviousness defense at trial that was not baseless.

Stryker Corp. v. Zimmer Inc. (Case No. 14-1520)

• Stryker won $228 million in a dispute with Zimmer Inc. in a case over surgical patents.

• Fed. Circ. reduced the award to $70 million upon the finding that Stryker was not entitled to enhanced damages because Zimmer’s defenses were not unreasonable.


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Innovention Toys LLC v. MGA Entertainment Inc. (Case No. 15-635)

• In 2012, a jury found MGA was liable for infringement and awarded $1.6 million in lost profits and reasonable royalty damages. Judge raised the damages award to $4.7 million (trebled damages) concluding MGA’s infringement was willful.

• In 2014, the Fed. Circ. reversed and slashed the additional award, finding that although MGA’s defense that the disputed patent invalid was rejected by a jury, the lower court erred in finding its position unreasonable.

• The case went briefly to the Supreme Court but was send back for consideration in light of Halo.

• In March 2017, the case went back to the district court who ruled the case still called for enhanced damages and fees, awarding $4.2 million in damages plus some prejudgment interest.


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WesternGeco LLC v. Ion Geophysical Corp. (Case No. 15-1085)

• A jury awarded WesternGeco $93.4 million in lost profits and $12.5 million in reasonable royalties after finding Ion infringed WesternGeco’s ocean floor surveying patents.

• Fed. Circ. affirmed the infringement finding and the reasonable royalty after Ion appealed, but said the Patent Act prohibits the award of lost profits, wiping out $93.4 million of the $106 million award. Federal Circuit agreed with the district court’s finding that the infringement was not willful.

• Supreme Court remanded the case on the issue of willfulness in light of its Halo decision relaxing the standard for enhanced patent damages.

• On remand, the Federal Circuit vacated the district court’s decision of no willful infringement, and remanded the case to the district court to consider two questions: (1) whether there was subjective willfulness (under the preponderance standard), and if so (2) whether, considering all relevant factors, enhanced damages should be awarded.


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Enhanced Damages ~ The Read Factors

Since Halo, the district courts when deciding whether to award enhanced damages, have continued to evaluate the following nine factors identified in Read Corp. v. Portec Inc.

1. whether the infringer deliberately copied the ideas or design of another;

2. whether the infringer, when he knew of the other's patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed;

3. the infringer's behavior as a party to the litigation;

4. the defendant's size and financial condition;

5. the closeness of the case;

6. the duration of defendant's misconduct;

7. remedial action by the defendant;

8. defendant's motivation for harm; and

9. whether defendant attempted to conceal its misconduct.

16-1456 (Fed. Circ. 2016)

Prism Technologies LLC v. Sprint Spectrum LP

• The jury awarded Prism $30 million in reasonable royalty damages. Prism moved for additional damages and an ongoing royalty for infringement post-dating the period (ending in 2014) that Prism said was covered by the jury award.

• The district court denied the motion finding the jury’s damages award included royalties for Sprint’s “past, present, and ongoing infringement.”

• Prism appealed and argued that an accounting and ongoing royalty should be awarded for additional monetary relief covering infringement past the period covered by the jury verdict.

• The Fed. Circ. agreed with the district court that the jury awarded damages for past, present, and future infringement.

• Damages expert valued patent value based on Sprint’s expected cost savings from avoiding the need to build its own backhaul network. Because those cost savings consisted, in large part, of Sprint’s initial capital costs, the jury could have reasonably found that the parties would have structured the agreement as a fully paid license. And it could have found support for that finding in Prism’s licensing practices.”

• At oral argument in this court, Prism’s counsel agreed that such a finding would have been reasonable on the evidence

Prism v. Sprint

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(Federal Circuit) March 2017

Prism Appeal ~ Ongoing Royalty

• To the extent that Prism reads WhitServe to mean that use of the term “damages” always excludes payments for “future” or “ongoing” infringement, it misreads the opinion. Although “damages” do not include ongoing royalties and other forms of equitable relief, they include fully paid licenses, which cut off the patentee’s claims of entitlement to future compensation. See Lucent Techs., 580 F.3d at 1326. Further, we have found a verdict form to be “ambiguous” even though it included the term “damages.” Telcordia Techs., 612 F.3d at 1378.

Prism v. Sprint

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Prism Appeal ~ Ongoing Royalty

• Prism sued AT&T Mobility in a separate case for infringement of the same patents. On the last day of the Prism v. AT&T trial, just before closing arguments, Prism and AT&T settled and the court dismissed the claims.

• Sprint asked the district court to refuse to admit the AT&T Settlement Agreement into evidence arguing it was not comparable to the hypothetical license and would be unfairly prejudicial. The court denied the motion and the AT&T Settlement Agreement was admitted.

• The jury awarded Prism $30 million in reasonable royalty damages. Sprint moved for JMOL and a new trial. The district court denied the motions and Sprint appealed. Sprint contends the court erred by (among other things):

• admitting the AT&T Settlement Agreement (Prism argued it should be admitted for its probative value in a supporting rather than a principal role on the proper amount of a reasonable royalty ~ which seeks to identify “the value of what was taken” by Sprint’s unauthorized use of Prism’s patented technology.)

• admitting Prism’s cost-savings damages evidence

Prism v. Sprint

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Sprint Appeal ~ Settlement Agreement & Cost Savings

• The Fed. Circ. has “recognized that, depending on the circumstances, a license agreement entered into in settling an earlier patent suit sometimes is admissible in a later patent suit involving the value of the patented technology, and sometimes it’s not.”

• “As to settlements generally, the Supreme Court has explained the normal settlement calculus for litigants: ‘Most defendants are unlikely to settle unless the cost of the predicted judgment, discounted by its probability, plus the transaction costs of further litigation, are greater than the cost of the settlement package.’”

• The Settlement Formulation

• The cost of the predicted judgment

• Its probability

• The cost of further litigation

Prism v. Sprint

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Sprint Appeal ~ Settlement Agreement

• Settlements at the end of the litigation process improves the answer

“Specifically, a settlement involving the patented technology can be probative of the technology’s value if that value was at issue in the earlier case. The reason is simple: such a settlement can reflect the assessment by interested and adversarial parties of the range of plausible litigation outcomes on that very issue of valuation. And given the necessary premise that discovery and adversarial processes tend to move a legal inquiry toward improved answers, the parties’ agreement seems especially probative if reached after the litigation was far enough along that the issue was already well explored and well tested.”

• Settlements may be too low relative to the value of the patented technology at issue in the later suit.

• “even if the technology is identical in the earlier and later suits, the earlier suit’s settlement figure may be too low to the extent that it was lowered by the patent owner’s discounting of value by a probability of losing on validity or infringement.”

• “A patent owner may also accept too little, relative to the patent’s value, when it accepts an amount out of a desire to avoid further expenditure of (presumptively unrecoverable) litigation costs.”

Prism v. Sprint

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• Settlements may be too high relative to the value of the patented technology at issue in the later suit.

• “An earlier settlement may cover technology either not the same as or comparable to the patented technology at issue in the later suit, or may cover the patented technology plus other technologies.”

• “The earlier suit may have included a risk of enhanced damages, a factor in the settling parties’ assessment of risk that would push settlement value above the value of the technology.”

• the “litigation costs still to come at the time of settlement may loom large in parties’ decisions to settle.”

Prism v. Sprint

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• The Fed. Circ. found the district court had an adequate basis for admitting the AT&T Settlement Agreement

• The agreement covered the patents as issue here (among others)

• Prism supplied the evidence needed that reasonably addressed what bearing the amounts in the Agreement had on the value of the particular patents at issue here.

• Agreement attributed amounts to particular patents

• Credible expert evidence about how the other patents related to AT&T’s business operations

• Evidence on the comparability of AT&T’s and Sprint’s use of the patented technology and the lesser used made by licensees in the lower-amount Prism settlements.

• “Sprint has not shown any reason—for example, material technological or market changes between the agreed-on date for the hypothetical negotiation, in early 2012, and the signing of the AT&T Settlement Agreement, in late 2014—that required the district court to find non-comparability and thus decisively undermined the Agreement’s probative value.”

Prism v. Sprint

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• The agreement was entered into after the entire trial was finished.

• The record was fully developed and thoroughly tested in the adversarial process, enhancing the reliability of the basis on which Prism and AT&T were assessing the likely outcomes.

• A very large share of the litigation costs had already been sunk, reducing the role of litigation-cost avoidance in the settlement decision

• Enhanced damages were not at issue

• Validity and infringement were still open issues at the time of settlement.

Prism v. Sprint

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• Prism’s principal damages evidence estimated costs Sprint avoided by infringing

• Prism presented evidence that a reasonable royalty would reflect Sprint’s willingness, in a hypothetical negotiation, to pay an amount calculated as the difference in cost that Sprint would have incurred if it had chosen not to infringe, while still providing its customers with the same quality of service.

• Prism’s expert estimated that Sprint’s cost savings, i.e., the difference between Sprint’s building costs and leasing costs, would be at least equal to Sprint’s leasing costs.

• Sprint argues that Prism’s approach was insufficiently tied to the “footprint” of the invention because Prism did not “invent” backhaul networks.

• Sprint also argues that Prism did not prove that Sprint’s leasing costs were an appropriate basis for estimating cost savings.

Prism v. Sprint

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Sprint Appeal ~ Cost Savings

• Fed. Circ. Rejects Sprint’s Appeal

• Royalty damages “attempts to ascertain the royalty upon which the parties would have agreed had they successfully negotiated an agreement just before infringement began.” Lucent Techs., 580 F.3d at 1324.

• Although a patentee “must carefully tie proof of damages to the claimed invention’s footprint in the market place,” Uniloc, 632 F.3d at 1317 (quoting ResQNet.com, 594 F.3d at 869), that requirement for valuing the patented technology can be met if the patentee adequately shows that the defendant’s infringement allowed it to avoid taking a different, more costly course of action.

• A price for a hypothetical license may appropriately be based on consideration of the “costs and availability of non-infringing alternatives” and the potential infringer’s “cost savings.” Aqua Shield, 774 F.3d at 771–72

• “Reliance upon estimated cost savings from use of the infringing product is a well-settled method of determining a reasonable royalty.” Hanson, 718 F.2d at 1080–81;

• Prism’s damages evidence complied with those principles

• Reliance on technical expert’s considerable experience and relevant industry publications

Prism v. Sprint

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Sprint Appeal ~ Cost Savings

Selected District Court Decisions

Based on the Federal Circuit’s actions in the Uniloc matter, various courts have continued to reject alternative damages approaches that are not sufficiently tied to the particular facts of a specific case.

• For example, in MAZ Encryption Techs. LLC v. Blackberry Corp., , the damages expert relied on a settlement agreement to determine his baseline damages estimate. While the expert did attempt to account for differences between a settlement negotiation and a hypothetical negotiation, he did so in a manner in which he estimated the likelihood of liability at 40% “based on a study that found that ‘patent holders tend to prevail approximately 40% of the time’ in the District of Delaware.” The district court found that this estimate “was not based on any facts relating to the merits of the Plaintiff’s case[,]” “did not consider the nature of the patent-in-suit, the accused products, or either party’s litigation strategy[,]” and was “not sufficiently tied to the particular facts of this case.”

Yet certain approaches continue to be accepted by the courts.

• In Odyssey Wireless, Inc. v. Apple Inc., Case No. 3:15-cv-01735-H-RBB, D.I. 324 , (S.D. Cal., Sept. 14, 2016), for example, Defendants moved to exclude the expert opinions of Plaintiff’s damages expert based, in part, on his reliance on “a 10/84 principle,” or, more specifically, the argument that “the parties in the hypothetical negotiation would recognize the assumption that the top 10 percent of patents related to LTE UE represent 84 percent of the value of the UE portion of the LTE Standard.” In this instance, the district court found this 10/84 principle to be sufficiently tied to the facts of the case and “not an arbitrary, general rule of thumb like the 25 percent rule or the Nash Bargaining Solution.”

Evidence Sufficiently Tied to the Facts

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Evidence Sufficiently Tied to the Facts

Questions?

Documents

Determining 'Damages Adequate to Compensate for the Infringement'download.pli.edu/WebContent/pm/186789/pdf/04-28-17_1000... · 2017-04-25 · Determining "Damages Adequate to Compensate