Wednesday, July 29, 2015

Canadian Court of Appeal Holds That Noninfringing Alternatives Are Relevant to Lost Profits

A recurring question in the law of patent remedies is whether a patent owner's ability to recover lost profits or an accounting of the infringer's profits should be affected by the fact that, if the defendant had not infringed, it could have made comparable sales by using an available noninfringing technology.  From an economic perspective, the correct answer is yes:  if the defendant would have made the same number of sales but for the infringement, the plaintiff has not lost any sales due to the infringement, and should recover only a reasonable royalty or, in countries which permit this remedy, the disgorgement of whatever additional profit or cost saving the defendant achieved by using the patented technology as opposed to the next-best alternative.  (Perhaps the defendant would have made the same number of sales using the alternative, but at slightly higher cost.)  Courts in the U.S. and France have long followed this principle, while the U.K. still adheres to a nineteenth century precedent, United Horse-Shoe & Nail Co. v. John Stewart & Co., rejecting it.  Courts in other parts of the world have given mixed signals.  In Canada, for example, the Supreme Court concluded in Monsanto v. Schmeiser, 2004 SCC 34, that noninfringing alternatives are relevant when the plaintiff seeks an accounting of the infringer's profits.  On the other hand, in two recent cases involving requests for lost profits, Eli Lilly & Co. v. Apotex Inc., 2014 FC 1254 (Jan. 23, 2015) (see blog post here), and  Merck & Co. v. Apotex, Inc., 2013 FC 751 (July 16, 2013) (see blog post here), trial courts in Canada have followed United Horse-Shoe.   (See also Professor Siebrasse's write-up on Sufficient Description of another recent Canadian trial court decision rejecting the use of noninfringing alternatives.)

Last week, however, the Federal Court of Appeal in Apotex, Inc. v. Merck & Co. (link here) held that noninfringing alternatives are indeed relevant to the calculation of lost profits (though the court dismissed the appeal on the ground that, as a factual matter, Apotex had not proven that it would have sold lovastatin made by use of a noninfringing process during the relevant time period).  Justice Dawson's analysis of the legal relevance of noninfringing alternative can be found in paragraphs 38-72, and her analysis of the factual evidence follows.  Key quotes from the Court of Appeal's legal analysis:
[48]           . . . if damages for lost profits are calculated never having regard to an available non-infringing alternative, the patentee will sometimes be better off than it would have been in the absence of infringement. This is so for the following reason. Where a defendant can make and sell a non-infringing alternative, the patent does not confer a complete monopoly on the patent holder. Instead, the patent confers a share of market power upon the patentee. In this circumstance, where, instead of using a non-infringing alternative, a defendant infringes, it is a question of fact whether, “but for” the infringement, the defendant would not have competed with it. The defendant’s lawful competition in the “but for” world may have deprived the patentee of some sales.
[49]           Put another way, in cases where, in the “but for” world, the infringer could and would have made and sold a non-infringing alternative, these sales may well reduce the patent owner’s sales. Awarding the patentee full damages for lost profits in every case will, therefore, sometimes over-compensate the patentee.
[50]           Perfect compensation requires consideration of: (i) what, if any, non-infringing product the defendant or any other competitors could and would have sold “but for” the infringement; and, (ii) the extent lawful competition would have reduced the patentee’s sales.
In addition, paragraph 60 quotes a portion of my book arguing that there is no policy reason to admit the relevance of noninfringing alternatives in cases involving accountings of profits, but to reject it in cases involving lost profits:
[60]           The Judge correctly understood that Monsanto did not change the existing law as to how the patentee’s lost profits are to be calculated. However, the significance of Monsanto is that if a court may consider a defendant’s resort to a non-infringing alternative when calculating the infringer’s profit, there is no reason in principle to ignore such conduct when calculating the patentee’s lost sales. This is particularly so where:
The problem with computing lost profits without considering the availability of noninfringing alternatives is that […] this practice renders the patentee better off than she would have been in the absence of infringement. (Analogously, ignoring noninfringing substitutes when calculating defendant’s profits renders defendants worse off than they would have been, but for the infringement.) [Emphasis in the original]
(Thomas F. Cotter, Comparative Patent Remedies: A Legal and Economic Analysis (New York: Oxford University Press 2013) at pages 189 to 190). 
As for the factual analysis, however, the court concludes, among other things, that Apotex did not prove that resort to the noninfringing process would have been economically feasible during the relevant period of time (paras. 91, 94).  Embracing the principle that noninfringing alternatives are relevant nevertheless is an important, and in my view welcome, contribution to the law of patent remedies.

Monday, July 27, 2015

Hinkelmann on Japanese Patent Damages Cases

Dr. Klaus Hinckelmann, author of Gewerblicher Rechtsschutz in Japan: Patente, Marken, Gebrauchsmuster, Geschmacksmuster, Know-how (Cologne, Germany : Carl Heymanns Verlag 2d ed. 2008) ("Industrial Property Rights in Japan:  Patents, Trademarks, Utility Models, Design Patents, Know-How"), has published an article titled Aktuelle Rechtsprechung auf dem Gebiet des japanischen Patentrechts ("Current Case Law in the Area of Japanese Patent Law") in the June 2015 issue of Mitteilungen der deutschen Patentanwälten (pp. 260-65).  The abstract (in my translation from the German) reads as follows:
Recent years have seen several important patent law judgments of the Japanese courts, especially the IP High Court.  This article discusses some important decisions of the last three years.  These decisions concern patentability (novelty, inventive step, enablement), the commencement of the national Japanese phase of international patent applications, the filing of an appeal, and patent infringement (damages, indirect infringement, claim construction, use in Japan).  The decisions illustrate, for example, the strict operation of the rules for commencing the national Japanese phase as well as a strict interpretation of the protective scope of product-by-process claims, but also an improved protection against patent infringement, insofar as the recognition of certain transactions as uses of a patent in Japan were improved and also the recovery of damages was made easier.
The two damages cases discussed are (1) Judgment of the IP High Court of Dec. 12, 2011, Case No. 2010 (Ne) 10091, and (2) Judgment of the IP High Court (Grand Panel) of Feb. 1, 2013, Case No. Hei-24 (Ne) 10015.  According to Dr. Hinkelmann, the first case (which I don't think I had come across before) holds that a patent owner cannot recover both lost profits and a reasonable royalty, but rather must choose one or the other.  This sounds reasonable, until you consider the case in which the plaintiff is able to prove that, say, the defendant sold 100 infringing goods, of which only 10 deprived the plaintiff of sales the plaintiff  would have made.  (Perhaps the plaintiff wouldn't have been able to compete for the other 90.)  From an economic standpoint, it would make sense for the plaintiff to recover lost profits on those 10 lost sales, and a reasonable royalty for the other 90.  Nevertheless, the case is consistent with an earlier Japanese case (Toei Tec K.K. v. Family K.K. (Massage Chair), Hei 17(ne) 10047 (IP High Ct. Sept. 25, 2006)) that I discuss in my book at pp. 315-18, and I believe that the same principle is applied in some other countries' laws as well (an issue I've been meaning to research for some time, but haven't).  The second case is one I have blogged about before (here, here, and here) and for which an English-language summary is available on the IP High Court's website (here).  The court awarded the plaintiff the defendant's profits under Japan Patent Act article 102(2), even though such awards are viewed in Japan as a proxy for the plaintiff's own lost profits and the plaintiff here did not itself practice the invention in Japan.  Its exclusive licensee sold products that embodied the patented technology, however, and the court was satisfied that the patentee lost profits as a result of the defendant's sales, so that was enough to invoke article 102(2).

On the product-by-process case referred to in the abstract, note that the Japanese Supreme Court reversed on June 5, 2015 (after Dr. Hinkelmann's article went to press), according to this blog post.

Thursday, July 23, 2015

Brazilian FRAND Ruling

Ed Taylor published a short article in the July 20 issue of Bloomberg BNA's World Intellectual Property Report titled Ericsson Wins Brazil Standard Essential Patent Dispute (available here, behind a paywall).  According to the article, on July 7 the Brazilian competition authority Conselho Administrativo de Defesa Economica (CADE) concluded that Ericsson did not violate Brazilian competition law by requesting injunctive relief in a dispute over 3G patents with TCT, which markets Alcatel products in Brazil.   Mr. Taylor was kind enough to provide me with a copy of the decision (which is dated June 8; I understand the July 7 decision rejected an appeal from the June 8 decision), available here (in Portuguese).

I don't read Portuguese, but assisted by Mr. Taylor's article and Google translate (which I used to generate a rough translation of the decision, and also of two other write-ups I found, one by Laura Ignacio and one by Cesar Peres Advocacia Empresarial), it appears that the patents in suit are subject to a FRAND commitment made to ETSI.  The Brazilian competition authority is of the view, however, that Ericsson did not violate Brazilian competition law by pursuing an infringement action TCT because (1) TCT delayed the negotiations over the terms of a license and did not establish its exhaustion defense; (2) Ericsson offered to arbitrate the amount of the royalty; and (3) Ericsson does not compete with TCT in the market for smartphones or tablets. 

It appears from this blog post, which I previously noted here, that a French court denied Ericsson a preliminary injunction against TCT Mobile in 2013, but I haven't investigated yet to determine if the Brazilian patents are exact counterparts to the ones at issue in the French case.

Wednesday, July 22, 2015

Apple Files Response to Petition for Rehearing Regarding Design Patent Damages

Florian Mueller has the details and links to Apple's brief, as well as to an amicus brief jointly filed by Dell, eBay, Google, Facebook, HP, Limelight, Newegg, and SAS here.   For my post earlier this month linking to Samsung's petition and an amicus brief filed by Professor Lemley, see here.

Tuesday, July 21, 2015

Two New Empirical Papers on the Effect of eBay on Injunctive Relief

1.  Christopher Seaman has posted a paper on ssrn titled Permanent Injunctions in Patent Litigation After eBay: An Empirical Study.  Here is a link to the paper, and here is the abstract:
The Supreme Court’s 2006 decision in eBay v. MercExchange is widely regarded as one of the most significant patent law rulings of the past decade. Prior to eBay, patent holders who prevailed on the merits in litigation nearly always obtained a permanent injunction against infringers. In eBay, however, the Court unanimously rejected the prevailing “general rule” that a prevailing patentee is entitled to an injunction, instead holding that lower courts must apply a four-factor test before granting such relief. Almost a decade later, however, significant questions remain regarding how this four-factor test is being applied, as there has there has been little rigorous empirical examination of eBay’s actual impact in patent litigation.
This Article helps fill this gap in the literature by reporting the results of an original empirical study of contested permanent injunction decisions in district courts for a 7½ year period following eBay. It finds that eBay has effectively created a bifurcated regime for patent remedies, where operating companies who compete against an infringer still obtain permanent injunctions in the vast majority of cases that are successfully litigated to judgment. In contrast, non-practicing entities almost always are denied injunctive relief. These findings are robust even after controlling for the field of patented technology and the particular court that decided the injunction request. It also finds that permanent injunction rates vary significantly based on patented technology and forum. Finally, this Article considers some implications of these findings for both participants in the patent system and policy makers more generally.
2.  Kirti Gupta and Jay Kesan have posted a paper on ssrn titled Studying the Impact of eBay on Injunctive Relief in Patent Cases.  Here is a link to the paper, and here is the abstract:
The Supreme Court’s 2006 decision on eBay Inc. vs MercExchange LLC (the eBay ruling) marked a turning point in the history of patent enforcement and policy. Almost a decade after the eBay ruling, there is still confusion about the implications and impact of this decision. Such questions still remain: Has the rate of injunctions been impacted, and if so, by how much? And, which types of parties are impacted - practicing or non-practicing entities? To our knowledge, there is not a systematic empirical study that explores whether the eBay ruling impacted practicing and non-practicing patent holders differentially, by examining an exhaustive set of rulings on both preliminary and permanent injunctions and comparing the rates pre-eBay and post-eBay. 
Employing a comprehensive dataset of patent cases from 2000-2012, we seek to address the following issues: (1) The difference in the rate at which both preliminary and permanent injunctions were granted for cases where an injunction was requested, including the rate at which these motions were filed pre- and post- eBay; (2) Whether the rate of injunctions granted was different based on patent ownership (practicing versus non-practicing entities). In addition, any outcome of patent cases must take into account the quality of the patents asserted. Therefore, while studying whether injunctions were granted or not, we control for proxies for patent quality based on the received citations and other metrics.
We find that the U.S. Supreme Court decision in eBay v. MercExchange has had a significant impact on injunctive relief in patent cases. Contrary to earlier empirical studies involving small sample datasets, our extensive analysis with a dataset involving thousands of patent cases both pre- and post- eBay shows that the eBay decision has reduced, rather dramatically, both the level at which injunctive relief is sought in patent cases and the rate at which they are granted, particularly for preliminary injunctions. We also study the impact of the eBay decision on the quality of patents for which injunctive relief is ought and the nature of the patent plaintiff (operating company vs. non-operating company) and their relative success rates with obtaining injunctive relief. This study raises important policy questions about the current diminished role for injunctive relief in patent cases and also the relationship between injunctions and the type of patent-plaintiff entity and patent quality.

Monday, July 20, 2015

Posner, Hovenkamp, Burshstein Respond to Kimble

I'm not the only one who is disappointed in the U.S. Supreme Court's refusal to overrule Brulotte v. Thys, the case establishing the per se unenforceability of postexpiration patent royalties (see my post here).  For further criticism of the Court's elevation of form over substance, see Judge Richard Posner's article in Slate (which also discusses the U.S. Supreme Court's decision in King v. Burwell, on the Affordable Care Act) and Professor Herb Hovenkamp's paper Brulotte's Web, available on ssrn here.  Key quote from Judge Posner:  "Justice Elena Kagan’s majority opinion is a veritable paean to stare decisis, which means adhering to precedent. When a half century–old precedent is demonstrably erroneous, and has not generated substantial reliance interests, and doesn’t even have a constitutional or statutory pedigree but is purely judge-created, the refusal to overrule it is mere antiquarianism."  Here is Professor Hovenkamp's abstract:
Kimble v. Marvel Entertainment held that stare decisis required the Supreme Court to adhere to the half century old, much criticized rule in Brulotte v. Thys. Justice Douglas' Brulotte opinion concluded that license agreements requiring royalties measured by use of a patent after its expiration are unenforceable per se. The court need not inquire into market power nor anticompetitive effects, effects on innovation, and it may not accept any defense. Congress can change the rule if it wants to, but has resisted many invitations to do so.
Under Brulotte a hybrid license on a patent and a trade secret requires a royalty reduction when the patent expires. But there is little reason for thinking that a process is worth more to a licensee when it is covered by both a patent and a trade secret than when it is covered by only a single right. What the licensee wants is access to a technology that reduces its costs or improves the quality of its output. Those numbers are determined by market value and product competition, and are not obviously affected by the number and kind of IP rights that they embody. For example, the price I am willing to pay for a patented weed killer for my back yard is not higher because I know that production of the weed killer is protected by a trade secret as well as a patent.
One area where Brulotte/Kimble threatens efficient risk sharing is reach through royalties. Researchers in some areas often require costly patented research tools, or inputs, that may produce considerable value once a successful product has been developed. The research might succeed in producing a valuable drug but there is also a high chance that it will fail. A rational way to price out such an asset is conditionally, perhaps with little or no royalty during the research period, but a substantial royalty down the road if the project succeeds. Depending on the age of the patent and the timeline for the project, this can contemplate royalties on the pharmaceutical drug long after the patent on the research tool expires.
A lively debate has emerged about the economics of reach through royalties, with some believing that they contribute to a patent "thicket" that is difficult for researchers to negotiate, and others arguing that they constitute a reasonable form of risk sharing. That issue is a serious one and should never be addressed by any rule as ham handed as the Brulotte per se rule against post-expiration royalties.
One problematic effect of Kimble is that antitrust tying law is undergoing a process of revision that is coming close to removing per se illegality. That has largely happened for just the reasons that the Court suggested: the underlying economic theory has changed, de-emphasizing harmful leverage and emphasizing efficiencies. By contrast, the patent law of tying arrangements -- heavily borrowed from antitrust -- remains stuck in a time warp until Congress gets around to changing it.
In defending its rule of stare decisis, the Kimble Court also observed that the challenged practice involved two areas of law, property and contract, where stare decisis has traditionally been regarded as strong because of reliance interests. A legal regime that previously permitted unlimited licensing but then adopted the Brulotte rule could certainly upset many reliance interests. When the legal change is in the other direction, however the weight of reliance interests is less clear. The real impact of overruling would be on those people, who like the parties in Kimble, wrote their agreements in ignorance of Brulotte. In such cases the effect of overruling would be that these parties would get precisely what they bargained for.
The Kimble Court rejected Kimble's proposed alternative -- namely, that post-expiration royalty extensions be addressed under a rule of reason. The Court found this unacceptable, substituting a bright line (although ill conceived) rule for something as complex and indeterminate as antitrust's rule of treason. But nearly every commercial transaction in the country is subject to antitrust evaluation under Section 1 of the Sherman Act. Agreements requiring post-expiration payments would join the general run of agreements that are nearly always legal. 
Finally, for those of you with access to Bloomberg BNA's World Intellectual Property Report, Canadian attorney Sheldon Burshstein has published an interesting article (available here, behind a paywall) titled "Law on Post-Patent Royalties Differs Between Canada and U.S."  As the title suggests, Mr. Burshtein believes that Kimble would have come out the other way in Canada.

Thursday, July 16, 2015

Huawei v. ZTE: Analysis

The long-awaited CJEU judgment in Huawei Techs. Co. v. ZTE Corp., Case C-170/13, takes something of a middle path to the question of whether it is an abuse of dominant position for the owner of a FRAND-encumbered standard-essential patent (SEP) to request injunctive relief against an alleged infringer.  Here are a few things that struck me:

1.  Like the Advocate General in his November 2014 opinion (which I blogged about here), the court emphasizes the need to balance various considerations:  
". . . the Court must strike a balance between maintaining free competition — in respect of which primary law and, in particular, Article 102 TFEU prohibit abuses of a dominant position — and the requirement to safeguard that proprietor’s intellectual-property rights and its right to effective judicial protection, guaranteed by Article 17(2) and Article 47 of the Charter [of Fundamental Rights of the European Union] respectively" (para. 42). 
2.  The court does not address the issue of whether ownership of an SEP necessarily proves market dominance, noting that "As the referring court states in the order for reference, the existence of a dominant position has not been contested before it by the parties to the dispute in the main proceedings. Given that the questions posed by the referring court relate only to the existence of an abuse, the analysis must be confined to the latter criterion" (para. 43).  My own view is that ownership of an SEP generally does establish dominance in the market for the (very specific) technology at issue, given that (if the patent really is standard-essential) there is no substitute for it--though conceivably there could be competing standards, which would complicate the analysis.  Others may disagree with my take on this, and perhaps the issue will turn up in some future case.  

3.  Like AG Wathelet, the court rejects both the German Federal Supreme Court's Orange-Book-Standard approach (which recognizes a competition law defense to a claim for injunctive relief only if the implementer comes forward with an offer that the owner cannot in good faith refuse and deposit money in escrow) and an expansive understanding of the European Commission's decision in Samsung (under which the owner of a FRAND-encumbered SEP abuses its dominant position if it asserts a claim for injunctive relief against an implementer who is willing to negotiate a license).  Instead, the court places the initial burden of coming forward with an offer on the SEP owner (noting, among other things, that as AG Wathelet observed "in view of the large number of SEPs composing a standard such as that at issue in the main proceedings, it is not certain that the infringer of one of those SEPs will necessarily be aware that it is using the teaching of an SEP that is both valid and essential to a standard", para. 62), but it also requires the implementer to satisfy some stringent conditions (not just, to quote from the second question presented to the court, the implementer's oral statement that "in a general way . . . it is prepared to enter into negotiations").  Here's what the court says (paras. 60-61, 63, 65-68):
Accordingly, the proprietor of an SEP which considers that that SEP is the subject of an infringement cannot, without infringing Article 102 TFEU, bring an action for a prohibitory injunction or for the recall of products against the alleged infringer without notice or prior consultation with the alleged infringer, even if the SEP has already been used by the alleged infringer.
Prior to such proceedings, it is thus for the proprietor of the SEP in question, first, to alert the alleged infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed. . . .
Secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, it is for the proprietor of the SEP to present to that alleged infringer a specific, written offer for a licence on FRAND terms, in accordance with the undertaking given to the standardisation body, specifying, in particular, the amount of the royalty and the way in which that royalty is to be calculated. . . .
. . . [I]t is for the alleged infringer diligently to respond to that offer, in accordance with recognised commercial practices in the field and in good faith, a point which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.
Should the alleged infringer not accept the offer made to it, it may rely on the abusive nature of an action for a prohibitory injunction or for the recall of products only if it has submitted to the proprietor of the SEP in question, promptly and in writing, a specific counter-offer that corresponds to FRAND terms.
Furthermore, where the alleged infringer is using the teachings of the SEP before a licensing agreement has been concluded, it is for that alleged infringer, from the point at which its counter-offer is rejected, to provide appropriate security, in accordance with recognised commercial practices in the field, for example by providing a bank guarantee or by placing the amounts necessary on deposit. The calculation of that security must include, inter alia, the number of the past acts of use of the SEP, and the alleged infringer must be able to render an account in respect of those acts of use.
In addition, where no agreement is reached on the details of the FRAND terms following the counter-offer by the alleged infringer, the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party, by decision without delay.
4.  Importantly, the court preserves the implementer's right to challenge validity and infringement:
having regard, first, to the fact that a standardisation body such as that which developed the standard at issue in the main proceedings does not check whether patents are valid or essential to the standard in which they are included during the standardisation procedure, and, secondly, to the right to effective judicial protection guaranteed by Article 47 of the Charter, an alleged infringer cannot be criticised either for challenging, in parallel to the negotiations relating to the grant of licences, the validity of those patents and/or the essential nature of those patents to the standard in which they are included and/or their actual use, or for reserving the right to do so in the future.
5.  The court also holds (not surprisingly) that it is not an abuse of dominant position to seek discovery on past uses of the SEP and damages for those past uses.

6.  Left unresolved, in my view, is the question of whether the analysis changes at all in a case (like the one that gave rise to Orange-Book-Standard) in which the standard is a de factor standard for which no FRAND commitment has been made.  The court did make a point of distinguishing cases like the one under consideration from other cases in which the court has discussed abuse of dominant position, stating in para. 51 that "the case in the main proceedings may be distinguished by the fact, as is apparent from paragraphs 15 to 17 and 22 of the present judgment, that the patent at issue obtained SEP status only in return for the proprietor’s irrevocable undertaking, given to the standardisation body in question, that it is prepared to grant licences on FRAND terms."  So is the FRAND commitment indispensable to the framework the court develops, or merely a relevant consideration?

7.  The court also remarks in para. 52 that "Although the proprietor of the essential patent at issue has the right to bring an action for a prohibitory injunction or for the recall of products, the fact that that patent has obtained SEP status means that its proprietor can prevent products manufactured by competitors from appearing or remaining on the market and, thereby, reserve to itself the manufacture of the products in question."  But what if the proprietor is a nonpracticing entity?  Is the owner's status as a competitor of the implementer in a downstream market an indispensable factor or just a relevant consideration?

8.  I don't see how the court's framework would impact non-SEP cases, so it would appear to me that outside the SEP context patent assertion entities would still be able to obtain injunctions--a serious limitation, in my view, on the competition-law approach to the issue of injunctive relief, but so it goes.