Friday, January 20, 2017

Updated Version of Cotter & Golden Paper on Empirical Studies of Patent Remedies

John Golden and I have posted an updated version of our paper Empirical Studies Relating to Patents—Remedies, which will be published in volume 2 of Research Handbook on the Economics of Intellectual Property Law (Peter Menell, David Schwartz & Ben Depoorter eds., Edward Elgar Publishing, forthcoming 2017).  Here is a link to the paper, and here is the abstract:
This chapter from the forthcoming Research Handbook on the Economics of Intellectual Property Law surveys the empirical literature on patent remedies. Part I discusses the literature on injunctions, beginning with an overview of legal doctrine and economic debates over “property rules” versus “liability rules,” and concluding with a summary of empirical studies that examine the frequency and circumstances of injunction grants or the nature of injunctions’ content and scope. Part II discusses the literature on patent damages, beginning with an overview of the law and economics of damages before proceeding to a review of the empirical literature on the prevalence of different types of damages, damages amounts, and possible explanations for damages outcomes. Part III briefly discusses other remedies, including declaratory judgments, for which there appears to be little relevant empirical literature. The Conclusion suggests possible avenues for future research.

Tuesday, January 17, 2017

FTC Files Antitrust Complaint Against Qualcomm

. . . and while on the subject of SEPs and FRAND (see today's other post below), I should note in addition that the U.S. Federal Trade Commission (FTC) voted earlier today to file a complaint in federal district court, accusing Qualcomm of unfair methods of competition in violation of section 5 of the Federal Trade Commission Act.  Here is a link to the FTC's press release, here is a link to the complaint, and here is a link to a dissenting statement filed by Commission Maureen Ohlhausen.  The press release summarizes the allegations as follows:
. . . The complaint alleges that Qualcomm:
  • Maintains a “no license, no chips” policy under which it will supply its baseband processors only on the condition that cell phone manufacturers agree to Qualcomm’s preferred license terms. The FTC alleges that this tactic forces cell phone manufacturers to pay elevated royalties to Qualcomm on products that use a competitor’s baseband processors. According to the Commission’s complaint, this is an anticompetitive tax on the use of rivals’ processors. “No license, no chips” is a condition that other suppliers of semiconductor devices do not impose. The risk of losing access to Qualcomm baseband processors is too great for a cell phone manufacturer to bear because it would preclude the manufacturer from selling phones for use on important cellular networks.
  • Refuses to license standard-essential patents to competitors. Despite its commitment to license standard-essential patents on FRAND terms, Qualcomm has consistently refused to license those patents to competing suppliers of baseband processors.
  • Extracted exclusivity from Apple in exchange for reduced patent royalties. Qualcomm precluded Apple from sourcing baseband processors from Qualcomm’s competitors from 2011 to 2016. Qualcomm recognized that any competitor that won Apple’s business would become stronger, and used exclusivity to prevent Apple from working with and improving the effectiveness of Qualcomm’s competitors.
    I need to review the complaint more carefully and give the matter some more thought.  If I am understanding the first point above correctly, though, the gist is that Qualcomm uses its dominance in the market for baseband processors to extract a supra-FRAND royalty for its SEPs, which the OEMs must pay whether or not they use Qualcomm processors.  Since excessive pricing is not itself an offense under U.S. antitrust law, though, the theory must be that Qualcomm is expanding or maintaining its monopoly in the baseband processor markets by making it more difficult for competitors in those markets to compete.  For example, suppose that Qualcomm initially charged a profit-maximizing price of $5 for a processor and $1 for a license to use a particular FRAND.  (The numbers are arbitrary, and for illustrative purposes only.)  Then Qualcomm decides to charge $4 for the processor and $2 for the SEP (regardless of whether the implementer uses a Qualcomm processor or an imperfect-substitute processor produced a competitive-fringe firm).  Suppose further that the imperfect-substitute firm's processor markets for $3.  The implementer will be less likely to buy the imperfect substitute if it has to pay $2, as opposed to $1, for the SEP (see para. 87).  And if the competing firm lowers its price from, say, $3 to $2 to attract some business from implementers, maybe it can't make enough of a profit to remain in the market.  Whether such alleged conduct, if proven, amounts to an antitrust offense is not immediately clear to me; couldn't Qualcomm achieve much the same effect by temporarily charging a low (but non-predatory) price for its processors?  That would result in lower prices, to be sure, but would have much the same effect of putting those competitors at a disadvantage and thus preserving Qualcomm's dominance.  But it's late as I write this, and maybe I'm overlooking something.  I'll give it some more thought tomorrow.

    Meanwhile, here are links to write-ups in the Wall Street Journal and Reuters.
Update:  I'm still mulling this over.  To the extent the FTC is alleging that Qualcomm is inhibiting licensees from challenging the validity or infringement of its SEPs, I can see how in theory that could amount in some cases to an antitrust violation, because it might preserve a monopoly in either the SEP or processor markets or both.  But since you can challenge patent validity without terminating the license (see MedImmune v. Genentech), I'm not sure why a motivated licensee wouldn't be able to do so.  Maybe it depends on what the specific licenses say, or maybe licensees are afraid that if they do challenge validity Qualcomm will refuse to sell them processors (shades of the Intergraph v. Intel--in which the Federal Circuit, however, reversed a preliminary injunction against Intel based on the latter's refusing to sell chips to a firm that was suing it for patent infringement).  Some of the allegations in the public version of the complaint are redacted, however, and there is an allegation (para. 127) that Qualcomm obligated Apple not to induce litigation challenging the licenses as non-FRAND.

As for the monopolization theory I was thinking about last night, I'm still inclined to think that an antitrust judge isn't going to want to get into the business of determining whether the price Qualcomm charges for its SEPs is too high.  Moreover, if the royalty isn't consistent with Qualcomm's FRAND obligations, couldn't the implementers (other than Apple, apparently) file suit for breach of contract as in Microsoft v. Motorola?  Though in that event, the court hearing the breach of contract claim would have to determine what a FRAND royalty is.  Given that option, though, is an antitrust claim necessary?

JRC Report on the Licensing Terms of SEPs

The Joint Research Centre (JRC), "the European Commission’s science and knowledge service," has just published a report titled Licensing Terms of Standard Essential Patents:  A Comprehensive Analysis of Cases, available here.  The authors are Chryssoula Pentheroudakis and Justus A. Baron, and the editor Nikolaus Thumm.  I'll have more to say about this report after I read it, but I thought readers of this blog would like to hear about it right away.  (Hat tip to Dr. Pentheroudakis for calling it to my attention.)  Here is the abstract:
The prospect of licensing patents that are essential to standards on an industry-wide scale is a major incentive for companies to invest in standardization activities. Most standard development organizations (SDOs) have defined intellectual property rights (IPR) policies whereby SDO members must commit to licensing their standard-essential patents (SEPs) on Fair, Reasonable and Non-Discriminatory (FRAND) terms. This study aims to provide a consistent framework for both the interpretation of FRAND commitments and the definition of FRAND royalties. Our methodology is built on the analysis of landmark and significant decisions taken by courts and competition authorities in Europe and worldwide. The purpose of the comparative analysis is to provide a comprehensive overview of how FRAND licensing terms have been defined in the evolving case law, while testing the economic soundness of the concepts and methodologies applied by courts and antitrust authorities.

Monday, January 16, 2017

CRA Report to the European Commission on SEP Licensing

Last month the European Commission published a study, prepared by Pierre Régibeau, Raphaël De Coninck, and Hanz Zengler of Charles River Associates (CRA) titled Transparency, Predictability, and Efficiency of SSO-based Standardization and SEP Licensing:  A Report for the European Commission, available here.  (Hat tip to Jorge Contreras for calling this to my attention.)  From the Commission's news release on the report:
In December 2016, the European Commission published a study assessing issues and solutions related to standard essential patents (SEPs) and the standardisation process.
The analysis builds on a previous report on patents and standards (PDF, 580kB) prepared for the Commission and on the responses to a public consultation on patents and standards in 2015. The analysis also covers standardisation challenges in the Internet of Things industries.
The report presents the costs and benefits of practical solutions to facilitate an efficient standardisation process and SEP licensing. Concrete recommendations are offered on different issues such as FRAND terms, over-declaration, essentiality checks, conflict resolution process and increasing transparency.
This study is part of the Commission's work to build an intellectual property rights framework enabling easy and fair access to SEPs, as described in the 2016 Communication, ICT Standardisation Priorities for the Digital Single Market.
Its results will be used to assess the interplay between standardisation and patents in the EU Single Market.
The report makes for important reading for anyone interested in SEPs, SSOs, and FRAND issues.  It provides an extensive discussion of, among other things, the economics of holdup, holdout, and royalty caps.  It also makes a number of recommendations (mostly directed at SSOs themselves) that need to be taken seriously, including requiring SSO members to make ex ante (that is, pre-standard adoption) "negative disclosures" of patents they do not intend to license on FRAND terms; introducing the random testing of declared-essential patents, to get a sense of what percentage actually are essential; and the imposition of aggregate royalty caps.  I'm inclined to think the last two proposals in particular have merit, not least because they would help in generating information that could be used in cases in which courts or arbitration panels are called upon to award FRAND royalties (see my paper on Patent Damages Heuristics, pages 44-46, as well as the CRA report p.87.) I'm also inclined to agree with the authors' recommendation against mandating the use of the "smallest tradable component" (a/k/a "smallest salable patent practicing unit," or "SSPPU") as the royalty base for SEP licensing.  Perhaps most interesting is the recommendation that "One should also consider stipulating that – in the spirit of Huawei a licensee could not be found to be 'unwilling' if the licensor insists on including a confidentiality requirement in the proposed 'full' contract that is supposed to discharge him of its FRAND obligations. Such a policy would appear useful in order to enforce the 'ND' part of FRAND" (p.88).  I kind of like the idea, but I imagine it would meet with stiff resistance from some quarters.

Thursday, January 12, 2017

Papers from the June 2016 Patent Damages Conference at the University of Texas

Drafts of the papers from the June 2016 Patent Damages Conference at the University of Texas are now available online, on the Review of Litigation's website (here).  Some of the papers will be published in that journal, others in the Texas Intellectual Property Law Journal.  Part 2 of the Conference on Patent Damages will take place at UT on February 17-18, 2017; you can access a draft schedule here.
Here is a complete list of the papers from the first conference, available on the Review of Litigation's website:

Foreword:  Patent Damages: Working With Limits (John M. Golden)

Reliable Problems from Unreliable Patent Damages (Erik Hovenkamp and Jonathan Masur)
A Restitution Perspective on Reasonable Royalties (John M. Golden and Karen Sandrik)

Rationalizing FRAND Royalties: Can Interpleader Save the Internet of Things? (Jason Bartlett and Jorge Contreras)

U.S. Patent Extraterritoriality within the International Context (Amy L. Landers)

Patent Assertion Entities, Reasonable Royalties, and a Restitution Perspective (W. Keith Robinson)

Enhanced Damages for Patent Infringement: A Normative Approach (Keith Hylton)

The Federal Circuit Disavows Mandatory Smallest Salable Patent-Practicing Unit "Rule" (Douglas A. Cawley and Lindsay Leavitt)

Patent Damages Heuristics (Thomas Cotter)

Reconceptualizing Patent "Comparables" (Colleen Chien)

Final Report of the Berkeley Center for Law & Technology Patent Damages Workshop (Stuart Graham, Peter Menell, Carl Shapiro, and Tim Simcoe)

Shared Patent Damages (Coming soon) (Michael Meurer)

Patent Damages Without Borders (Sapna Kumar)

Innovation Factors for Reasonable Royalties (Ted Sichelman)

Buying Monopoly: Antitrust Limits on Damages for Externally Acquired Patents (Erik Hovenkamp and Herbert Hovenkamp)

Gatekeeping Trends in Reasonable Royalty Cases (Andrew Amerson)

Tuesday, January 10, 2017

Reminder: IP Chat Channel Webinar on Design Patent Damages

As I mentioned just before the holidays, on Thursday January 12, 2017, at 2 p.m. Eastern Time I'll be one of three panelists for an IP Chat Channel webinar titled Future of Design Patent Damages After Apple v. Samsung.  Here is a link to the website, if you'd like to register, and here is a description of the event: 
In its recent opinion, the U.S. Supreme Court answered this question posed by Samsung: "Where a design patent is applied to only a component of a product, should an award of infringer's profits be limited to those profits attributable to the component?" The reply of the unanimous court, in an opinion written by Judge Sotomayor: "The term 'article of manufacture' is broad enough to embrace both a product sold to a consumer and a component of that product, whether sold separately or not." That answer rejects the Federal Circuit's longstanding interpretation of Section 289.
However, experts say the Supreme Court's opinion raises many more questions. The Federal Circuit must now create a test that will allow a jury to determine whether the "article of manufacture" covered by a design patent is the entire product or a component, and what that component is. For now, it is not clear whether the patent owner or the defendant bears the burden of proof. Then it will be up to a judge to apportion to the component some part of the infringer's entire profits on the product. Our panel -- a design patent litigator, a damages expert, and a law professor specializing in patent damages -- will discuss how the law of design patent damages might evolve, and see what the options might mean applied to cases currently being litigated such as Apple v. Samsung and Nordock v. Systems.
The other two panelists will be Dawn Hall, Senior Managing Director at FTI Consulting, and Richard Stockton of Banner & Witcoff, Ltd.  

Monday, January 9, 2017

Some New Papers on Remedies

1.  Jorge Contreras and Michael Eixenberger have posted a paper on ssrn titled Model Jury Instructions for Reasonable Royalty Patent Damages, 57 Jurimetrics J. __ (forthcoming 2017).  Here is a link to the paper, and here is the abstract:
Consistent, accurate and understandable jury instructions are critical to the determination of damages in patent cases. In January 2016 the Federal Circuit Bar Association (“FCBA”) amended its popular model jury instructions. Among other things, the 2016 amendments substantially reframed the instructions regarding the calculation of reasonable royalty damages in patent cases, replacing the fifteen “Georgia-Pacific” factors with a streamlined set of three factors emphasizing the value contribution of the patented technology to the overall product and comparable license agreements. This Essay discusses the history and implications of the FCBA instruction change for reasonable royalty damages. It assesses the adherence of the reformulated damages analysis to the Federal Circuit’s rulings regarding damages calculations in Ericsson v. D-Link and other recent case law, and compares the FCBA instruction with corresponding instructions developed by the American Intellectual Property Law Association (“AIPLA”) and the Northern District of California. We also present new empirical data regarding the use and adoption of model jury instructions in cases in which reasonable royalty damages are adjudicated. We find that a wide variety of instructions are used, partially defeating the goals of consistency and efficiency that model instructions seek to achieve. We conclude by recommending that the Federal Circuit endorse a single set of model jury instructions for patent cases, and that it consider the new FCBA instructions for this purpose. We also urge the FCBA and other organizations developing model jury instructions to continue to emphasize the traditional incremental value approach to patent valuation, and to develop additional jury instructions addressing issues raised by standards-essential patents.
This is a very interesting paper, and it makes what appear to me to be some sensible recommendations. 

2.  Timothy Holbrook has posted a paper on ssrn titled Boundaries, Extraterritoriality, and Patent Infringement Damages, 92 Notre Dame Law Review __ (forthcoming 2017).  Here is a link to the paper, and here is the abstract: 
Patents are generally considered to be the most territorial of all the various forms of intellectual property. Even patent law, however, has confronted issues of applying a U.S. patent to extraterritorial activity. The approach by the US Court of Appeals for the Federal Circuit has been, at best, inconsistent. At times the court has afforded extraterritorial protection, even in the face of strong territorial language in the patent statute itself. At other times, however, it has approached the issue of extraterritoriality more restrictively, even when the statute itself expressly contemplates the regulation of activities outside of the United States. This dynamic has been addressed by myself and other scholars.
More recently, however, the Federal Circuit has addressed the issue of patent damages for extraterritorial activities. These scenarios have arisen because there necessarily has been an act of domestic patent infringement. The damages theory advocated by the patent holder, however, has attempted to ensnare overseas sales, either under a lost profits or reasonable royalty theory. Additionally, the Federal Circuit has begun to address the appropriate scope of damages for infringement under § 271(f) of the Patent Act, a provision that defines infringement as the exportation of all of the components of an invention, or a single component with no substantial non-infringing use, where it is to be assembled abroad. Necessarily, this provision contemplates the regulation of foreign markets through the domestic hook of acts of exportation. The Federal Circuit, nevertheless, rejected the patentee’s requested remedy in this case.
This Article turns to the issue of the extraterritorial reach of patent damages. It suggests that the Federal Circuit’s approach is lacks nuance to account for the particular economic and legal circumstances that differentiates the different infringement provisions at stake. It draws on earlier work where I advocated for a conflicts-based approach to extraterritorial application of U.S. patents and extends that work to these scenarios, offering a more balanced approach to assessing whether damages are appropriate in these circumstances.
Finally, the article explores whether the various damages theories involved in these cases, regardless of the territorial limits, suggests it is time to revisit the foreseeability/proximate cause aspect of Rite-Hite. The theories of damages seem quite far removed from the actual acts of infringement, even if they occurred within the United States. Some scholars have begun work on this enterprise, and these cases suggest such consideration is ripe. 
3.  Bert Huang has published a paper titled The Equipoise Effect, 116 Columbia Law Review 1595 (2016).  Here is a link to the paper, and here is the abstract:
This Essay explores an overlooked way to use the remedy of disgorgement in torts, contracts, and regulation. It begins with a reminder that disgorging net gains does not force the liable actor to take a loss; by definition, it allows him to break even. As a matter of incentives, it places him in a sort of equipoise. This equipoise effect has a logical upshot that might seem counterintuitive: Substituting disgorgement for any other remedy, part of the time, can emulate the incentive effect of using that other remedy all of the time.
In theory, then, courts or regulators can sometimes substitute disgorgement for compensatory or expectation damages without undoing the benefits of harm internalization. This flexibility may prove especially useful in contexts where harm can be hard to measure. The accuracy of such emulation will depend on certain ideal conditions, however, and circumstances such as information costs will affect whether the approach is feasible and attractive.
The paper makes some interesting theoretical points, and some of the author's examples are based on patent and copyright cases.  On the deterrence point, though, if (as is widely believed) most patent infringement these days is inadvertent, I'd be concerned that the disgorgement remedy risks significant overdeterrence.  On the other hand, if we limit the disgorgement option to cases of intentional or advertent infringement (assuming we can define what that means, and in a way that can be readily administered) it might make sense to consider disgorgement in some cases--though if it were to be as an alternative to compensatory damages (reasonable royalties) in cases where the latter are hard to estimate, I wonder if patentees would have an incentive to overestimate the difficulty of calculating royalties . . .