Monday, March 31, 2014

Some recent papers on the Huawei-InterDigital FRAND dispute in China

Many readers are no doubt aware of the 2013 decision of the Shenzhen Intermediate People's Court in a case in which Huawei accused InterDigital of violating its obligation to license certain patents on FRAND terms.  (There were actually two complaints, the other accusing InterDigital of unlawful tying and excessive pricing in violation of Chinese competition law.)  The court concluded that a FRAND royalty would be no more than 0.019% of the value of each Huawei product.  The opinion was not published, although the judges subsequently published two articles about the case (in Chinese, of course; to my knowledge, no English-language translations of the articles in their entirety have been published yet, though I imagine someone will be motivated to publish translations at some point).  The judgment was affirmed on appeal, and earlier this year the parties settled their global patent disputes.  For previous coverage on this blog, see here and here.  I've also previously mentioned the paper by Professors Sokol and Zheng (see here and here), titled FRAND in China (available on ssrn here).  The authors discuss, among other things, some features of a redacted version of the actual (unpublished) opinion, to which they had access (see pages 27-34). According to Sokol and Zheng:
To determine the reasonableness of the licensing terms offered by InterDigital to Huawei, the court examined publicly available information, including information on InterDigital’s licensing revenues, to estimate the fees that InterDigital charged or proposed to charge Apple and Samsung. The court needed to reverse engineer these numbers because InterDigital refused to disclose them, fearing that they would be provided to non-parties to the case. The court then compared those estimates to the fees that InterDigital had demanded from Huawei and found the latter to be much higher. In this respect, the unpublished decisions mirror the analysis in the judges’ articles.

Some factors mentioned in both the judges’ articles and the unpublished decision look different from factors that would be relevant in a U.S. proceeding. The InterDigital judges in their articles mentioned jobs-related factors. Huawei employs 51,000 R&D staff with over 49,000 patent applications and 17,765 patents granted worldwide. In contrast, InterDigital has 260 R&D personnel with only 19,500 patents and patent applications. The judges also noted that InterDigital does “not engage in any substantive production activities.”  Indeed, in the articles, when discussing the reasonableness of InterDigital’s offers and the abuse of dominance by InterDigital, the judges rely heavily on the fact that InterDigital does not have a production business. The judges stated that the consideration of those factors was intended to measure the “rate of return that would be commensurate with InterDigital’s contributions to telecommunications technologies.” Apparently, the judges were assuming that the number of research personnel and the number of patents and patent applications were a good indicator of the value of the patents—an assumption that is obviously false.
Two more recent papers discussing this case are Fei Deng & Su Sun, Determining the FRAND Rate:  U.S. Perspectives on Huawei v. InterDigital, CPI Antitrust Chronicle, Feb. 2014(1), available here, and David S. Evans, Vanessa Yanhua Zhang, & Xinhua Zhang, Assessing Unfair Pricing under China's Anti-Monopoly Law for Innovation-Intensive Industries, available on ssrn here.  

The Deng/Sun paper focuses on the Chinese court's use of assertedly comparable licenses to determine the FRAND rate, and provides a translation of a portion of one of the Chinese judges' articles on this issue.  The authors argue that the two comparable licenses the court used (between InterDigital and Samsung, and between InterDigital and Apple) may not have been very comparable in actuality to a hypothetical license between InterDigital and Huawei, given that the Samsung license was in settlement of litigation; the Apple license "might not have been entered based on RAND considerations"; the "patents covered by InterDigital's licenses with Apple and Samsung may not be totally identical to what would be included in the license with Huawei" and may cover different specific standards within the 2G, 3G, and 4G standards; the uncertainty over whether the Samsung and Apple licenses had other provisions, such as grantbacks or cross-licenses; the dissimilarity of the products made by the licensees; and the fact that the Apple license was a lump-sum license, which means that "when turning it into a per unit royalty one should use the projected sales units at the time of license negotiation as the denominator, instead of the actual sale units" (pp. 9-12).

The second paper is somewhat broader in scope, but discusses the Huawei v. InterDigital case towards the very end (pp. 50-52).  As the authors note at the beginning of the paper, "Article 17(1) of China’s Anti-Monopoly Law (AML) prohibits dominant firms from 'selling commodities at unfairly high prices or buying commodities at unfairly low prices.'”  In the discussion of Huawei, the authors state:
It is difficult to conclude much about the direction that the Chinese courts will take on the application Article 17(1) to IPR given that the unfair pricing claim was just one of several antitrust claims; much of the analysis of prices themselves occurred in the FRAND contract case; the decisions themselves have not been published; and the decisions have not been heard by the Supreme People’s Court. Moreover, InterDigital does not seem to have submitted sufficient evidence about its licensing agreements to permit the court to make a fully informed analysis.

Subject to these caveats, one interesting aspect of the decision is that it does not appear to have expressly addressed Article 55 of the AML, which exempts the exercise of IPRs from antitrust scrutiny unless those rights are used to eliminate or restrict market competition. It may be that the court concluded that the extreme disparities it found in rates charged to different licensees had such an anticompetitive effect, but that is not clear from the information about the case that is publicly available. If the court did not make such a finding, it would be hard to reconcile the decision with Article 55. In that case, the court’s approach would also be inconsistent with the approach in most other jurisdictions of limiting excessive pricing cases regarding IPRs to situations in which a firm pursued an exclusionary strategy.

Nevertheless, the judges for the Shenzen Intermediate Court made a conscientious effort to address a set of difficult issues concerning negotiating FRAND royalty rates for SEPs. This Chinese court is not the first to find this topic challenging. We are therefore optimistic that the Chinese courts will find the approach towards unfair pricing followed in other jurisdictions, and in particular towards innovative-intensive industries, helpful in shaping the case law on the application of Article 17(1).
This is, indeed, a more optimistic perspective than that expressed by Professors Sokol and Zheng (who conclude their paper by noting that "To the extent that industrial policy does guide FRAND policy in China, it presents negative consequences for innovation in China") and more aligned with that of Drs. Deng and Sun, who note that while "economic experts . . . are still largely absent in [Chinese] intellectual property litigation," a trend towards greater acceptance of "in-depth economic analyses . . . can be expected in the near future" (p.13).  

Thursday, March 27, 2014

Eliminating remedies against infringing customers: a simple solution to reining in customer lawsuits?

This may be a completely off-the-wall idea, but sometimes it's worth proposing something a little unusual to see if it's worth pursuing in greater depth (or not).  One of the more contentious issues in the current patent trolling debate is this:  when a manufacturer allegedly incorporates an infringing technology into a device and then sells that device to a purchaser (who in turn may resell it to another purchaser, etc. etc. until it winds up being used by the ultimate end user or users), should the patent owner be able to sue the person or persons at or near the end of the distribution chain?  As Professors Love and Yoon state in their recent article Expanding the Customer Suit Exception in Patent Law, 93 B.U. L. Rev. 1605 (2013), available here:
Recent years have seen a marked increase in patent suits filed primarily for nuisance value. Nonpracticing patent holders . . . have collectively sued thousands of alleged patent infringers in cases that generally settle for less than the cost of mounting even the slightest defense. Suits like these overwhelmingly target the numerous resellers and end users of allegedly infringing products rather than the accused products’ original manufacturers. More individual defendants mean more lawyers, more discovery, and, thus, more litigation costs to inflate settlement amounts.
Love and Yoon propose that courts should more frequently stay litigation against customers pending the resolution of litigation against the infringing manufacturer.  Congressman Goodlatte's proposed Innovation Act also would expand courts' ability to stay litigation against customers under some circumstances.  Alternatively, some state legislatures and state attorneys-general in the U.S. have begun using or modifying unfair competition or deceptive trade practices laws in response to perceived problems arising from NPE suits against customers. 

Some years back Roger Blair and I published a paper titled An Economic Analysis of User and Seller Liability in Intellectual Property Law, 68 U. Cin. L. Rev. 1 (1999), a version of which is still available on ssrn here, in which we posed the question why U.S. patent law renders everyone in the chain of distribution, from the initial infringing manufacturer all the way down to the end user, liable for infringement--as it generally does under Patent Act section 271(a), which states that "Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent."  We suggested that a reason for extending liability all the way down the chain is to preserve the patent incentive:  in some instances, the infringing manufacturer might be judgment-proof or otherwise not amenable to suit, and so the extension of liability down the chain helps to ensure that the patentee will be able to recover damages from someone.  Moreover, the parties farther down the chain can contract for indemnification from the parties further up the chain (and in some though not all instances, such an indemnification might even be implied as a matter of commercial law, see id. at 21 n.81).  Nevertheless, we were doubtful whether this rationale provided much support for extending liability all the way down the chain:
First, nothing in the analysis thus far provides a strong reason for holding private noncommercial users liable; one would expect that in most cases the effect on incentives of being able to sue a consumer for using a patented invention would be virtually nil. On the other hand, since patentees do not appear in practice to sue consumers for the unauthorized use of their inventions, the extension of liability may do little harm, and perhaps it serves to economize on litigation costs: by not distinguishing between commercial users and private consumers, we avoid the costs of having to determine what constitutes a commercial use. Still, the American practice is at odds with that of other countries, such as Britain and France, that specifically exempt private noncommercial uses from the scope of liability. 
Id. at 27 (citing, for the proposition about French and English law, Code de la propriété intellectuelle, art. 613-5(a) (Fr.) (exempting from liability under French law private, noncommercial uses of patents), and Patents Act, 1977, § 60(5)(a) (Eng.) (same)). 

We also noted, however, that there is a provision of the U.S. Patent Act that in very limited circumstances does express a preference for pursuing a claim against someone higher up the chain than the end user or retail seller:  namely, section 271(g).  In relevant part, this provision reads as follows:
Whoever without authority imports into the United States or offers to sell, sells, or uses within the United States a product which is made by a process patented in the United States shall be liable as an infringer, if the importation, offer to sell, sale, or use of the product occurs during the term of such process patent. In an action for infringement of a process patent, no remedy may be granted for infringement on account of the noncommercial use or retail sale of a product unless there is no adequate remedy under this title for infringement on account of the importation or other use, offer to sell, or sale of that product. 
It seems to me that, from an economic perspective, that second sentence of section 271(g) gets things right:  the patentee can pursue a claim against a retailer or consumer for the infringement of a process patent if it is absolutely necessary (if "there is no adequate remedy" against anyone else), but not otherwise.  And, as we noted in 1999, other major patent systems also exempt private noncommercial users, though not retailers, from liability.  (The German Patent Act has a provision similar to the one in the French and English statutes we cited in 1999, as discussed in my book at p.226 n.29.  There may be other countries that follow this approach as well, but I haven't done exhaustive research on the matter.)

The question then is, why not amend the Patent Act to make all claims against end users and retailers subject to the rule stated in section 271(g)--in other words, the patentee can obtain a remedy against these defendants only if there is no adequate remedy against someone higher up the chain of distribution?  One problem would be that some of the conduct at issue in the NPE suits is or could be deemed "commercial" in nature:  a small business's use of allegedly infringing office equipment might be for business purposes, for example.  So the term "noncommercial" would have to be defined in some way to exclude these uses; or a different word chosen.

So how about something like this:  amend section 271(a) to read
Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.  However, no remedy may be granted for direct infringement on account of a customer's use or resale of the invention, unless there is no adequate remedy under this title for infringement on account of another person's manufacture, importation, use, offer to sell, or sale of that invention.
In some respects, this might be a simple solution to the perceived problems with customer suits.  On the other hand, maybe the proposal goes too far; maybe there are instances in which it would be more efficient to allow the patentee to sue, say, a distributor without having to show that there is no adequate remedy against the manufacturer.  (Professor Siebrasse suggests the possibility of several small manufacturers all designing the same, infringing product for purchase by a big distributor.  One suit against the big distributor might be more efficient than one or more against numerous small manufacturers.)  The question would be whether such cases are significant enough to keep the existing rule in place. 

Another possible objection is that the proposal in some instances would eliminate the possibility of recovering against a purchaser who knowingly instructed a manufacturer to make infringing articles for the purchaser, though I think I've covered that by putting the word "direct" before "infringement" in the above.  In such a case, the patentee could sue the purchaser for inducing infringement without bothering to sue the manufacturer, if that's what the patentee wanted to do.  Notice too that if the purchaser had an inventory of infringing merchandise on hand, the patentee presumably could get an injunction against the purchaser's selling that merchandise, because otherwise there might be no adequate remedy at law with respect to those prospective sales.
Again, at the end of the day maybe this proposed solution is not warranted or is no better than other solutions that focus on stays; but I still find it intriguing.  I'd welcome additional thoughts or comments from readers.  Maybe someone else has already proposed or critiqued something like this, in some article or blog post I haven't seen.

Monday, March 24, 2014

AIPPI Q236: Relief in Proceedings Other than Injunctions or Damages, Part 3: On Reasonable Royalties

In two previous posts (here and here) I've discussed Q236 ("Relief in Proceedings Other than Injunctions or Damages") as posed by AIPPI (the Association Internationale pour la Protection de la Propriété Intellectuelle, or International Association for the Protection of Intellectual Property) to its member groups in 2012.  The first post described what the AIPPI is and listed the specific questions encompassed within Q236, while the second post provided the AIPPI's September 2013 resolution on Q236 and my initial observations.  I mentioned then that I would return with another post or posts addressing some of the specific matters that struck me in reading through the member group reports and the AIPPI's summary report.  This post will focus on the issue of reasonable royalties.  My fourth and final post in this series will discuss some remaining issues.

As noted in my second post, with respect to reasonable royalties the AIPPI's Working Guidelines state that "while actually a measure of damages, a court (or applicable administrative body) may sometimes award monetary relief measured on the basis of a presumed licence fee or reasonable royalty rate as if the IPR holder and infringer had entered into a voluntary licensing arrangement."   Similarly, the Summary Report (which, along with all of the other relevant documents, is accessible here) states (at p.3) that "in a number of jurisdictions, a reasonable royalty is merely a measure of damages, rather than being available as a separate or alternative form of monetary relief," but that nineteen of the forty responding member groups characterized it as a separate or alternative form.  Pages 7-8 then summarizes some of the specifics:  for example, in several countries reasonable royalties are not available for trade secret misappropriation; in China, reasonable royalties are available in patent cases only when lost profits or the defendant's profits cannot be proven (as I discuss at pages 353-54 of my book); in France, they are viewed as "an alternative to damages for patents, but only as a method for calculating damages for" trademark and copyright infringement; in Germany, they "[m]ay be ordered if a damages claim is time-barred" (p.10); and in Japan they are "used as the amount of a claim for unjust enrichment and also as a basis for calculation of damages."  (I also discussed this point under German and Japanese law in this post in September.)

Some of the practical significance of classifying reasonable royalties as "damages" or as something else can be gleaned from above.  First, classifying reasonable royalties as "damages" seems to suggest that they are essentially a claim for "lost royalties."  Where there is no established royalty or the patentee wouldn't have actually licensed the patent, this "lost royalties" theory might seem a  bit of a fiction, though I think it is still reasonable to think of it as a damages claim:  the patentee was entitled to (at least) compensation in the form of a reasonable royalty, and by having failed to pay that royalty before commencing use the defendant has caused the patentee to suffer a loss.  In any event, some jurisdictions (for example, the U.S.) appear to classify reasonable royalties this way by statute.  See 35 U.S.C. section 284 ("Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer").  On this view, however, there are, literally, no "damages," and no reasonable royalty should be awarded, in at least two circumstances:  (1) when it appears that, but for the infringement, the defendant never would have licensed the patented technology because there was a less expensive noninfringing alternative that was just as good as the patented technology; or (2) there is a failure of proof, for example, where the plaintiff introduces no admissible evidence as to the amount of the royalty and the court may not simply guess what an appropriate royalty would have been.  The latter situation occurred in the Apple v. Motorola case over which Judge Posner presided two years ago, the appeal from which we are daily awaiting.  Although this may be correct as a matter of policy, whether this is the correct result under U.S. law is an interesting question.  As noted above, the statute says "but in no event less than a reasonable royalty," and some courts understand that to mean that the prevailing plaintiff is entitled to some royalty even if the evidence is quite thin.  (For an interesting recent discussion, see the district court opinion in Interwoven Inc. v. Vertical Computer Systems, accessible from the Patent Damages Blog here.)  

Relatedly, Colm Ahern has an interesting discussion of Spanish law in his post Is Proof of Damages Required in Spain If Patentee Opts for Equivalent Royalty? over at PatLit.  Mr. Ahern notes that article 13 of the 2004 EC Enforcement Directive appears to equate reasonable royalties with damages, but that this characterization can raise problems in some countries' laws, particularly where the patentee does not exploit the patent in that country.  He states that a recent decision from the Madrid Appeal Court allows the patentee to recover reasonable royalties nonetheless, on the theory that the remedy is grounded in "the illegitimate invasion of [an] exclusive right."

An alternative way of looking at reasonable royalties, as suggested above (and in Mr. Ahern's post as well) is to ground them in the law of unjust enrichment (rather than "damages").  The theory is that the defendant gained a benefit to which it was not entitled--it saved itself the expense of paying a royalty.  (Of course, you could take the analysis further and say that the defendant was unjustly enriched in the amount of the profit it earned or the expenses it saved as a result of the infringement, and this provides a way of thinking about the remedy of an accounting of defendant's profits, which I may take up in a future post.)  Judge Posner made this point too in Apple v. Motorola (which I quote and discuss at pages 25-26 & n.94 of this paper):
The monetary remedy in patent cases is measured as I have already noted either by the patentee’s loss or by the value of the infringement to the infringer.  The premise of the alternative measure—value to the infringer—is that had the infringer negotiated for a license rather than infringing, that value would have been transmuted into a license fee paid to the patentee, and the loss of that fee constitutes damages suffered by the patentee.  “Restitution measured by the market value of an unauthorized use appeared at an early date as a remedy for patent infringement, in cases where the patentee was unable to prove either his own damages or the infringer’s profits.  (Although such an award has always been denominated ‘damages’ in the context of patent infringement, it is more accurately described as a species of restitution for the value of a benefit wrongly obtained.)  Unlike the accounting for the infringer’s profits, restitution measured by use value survives in the current Patent Act.”  Restatement (Third) of Restitution and Unjust Enrichment § 42, comments c and f (2011); see also George E. Palmer, The Law of Restitution § 2.7, pp. 93–94 (1978); Roger D. Blair & Thomas F. Cotter, “An Economic Analysis of Damages Rules in Intellectual Property Law,” 39 William & Mary L. Rev. 1585, 1650 (1998). 
As suggested above, this alternative characterization sometimes allows litigants in Germany and Japan to recover monetary relief even though the statute of limitations for "damages" has run.  

Finally, as I discuss in the paper referenced above, under U.S. law another theoretical consequence of grounding reasonable royalties in the law of unjust enrichment rather than "damages" might be that this would provide a basis for characterizing royalties as "equitable" rather than "legal" relief, and thus eliminating the right to trial by jury.  I'm not entirely convinced by the argument myself, though, and in any event it is, as stated, more theoretical than something that stands a realistic chance of being taken up in legislation.  Not surprisingly, this matter is not taken up in any of the AIPPI member group reports; as a practical matter, to my knowledge no country other than the U.S. tries patent infringement cases by jury.  

Thursday, March 20, 2014

Are noninfringing alternatives relevant to the determination of reasonable royalties in U.K. patent cases?

Most economists, and I imagine most patent attorneys as well, would respond to the above question by stating "How could noninfringing alternatives not be relevant?"  After all, if a reasonable royalty is intended to approximate the royalty the patentee and the infringer would have agreed to ex ante--the so-called willing licensor-willing licensee framework, some version of which most major patent systems appear to follow--it's hard to imagine how noninfringing alternatives could not be relevant.  The maximum amount a would-be user would pay for the use of a patented technology is the benefit he expects to derive from using that technology minus the net benefit of using the alternative.  Courts in the U.S., Canada, and Germany seem to recognize this principle as well, as I explain in my book (see pages 121-22, 128-29, 195-96, 268).  Indeed, the principle was recently reaffirmed in a German case (OLG Karlsruhe, Judgment of Aug. 5, 2013, 6 U 114/12, para. 76), that was reported in a recent issue of GRUR-RR and is also available here).

One major outlier is, arguably, the U.K.  As I have explained in my book and elsewhere, an 1888 decision of the House of Lords, United Horse-Shoe & Nail Co. v. John Stewart & Co., (1888) L.R. 13 App. Cas. 401 (appeal taken from Scotland), held (for no very persuasive economic reason, and contrary to U.S. practice) that noninfringing alternatives are irrelevant for purposes of determining lost profits.  Courts in the U.K. have continued to cite United Horse-Shoe favorably ever since.  Compounding the error, a 1983 decision of the Patent Court held that noninfringing alternatives also are irrelevant for the purpose of determining a reasonable royalty as well.  See Catnic Components Ltd. v. Hill & Smith Ltd., [1983] F.S.R. 512, 532 (Pat. Ct.) (Eng.):
In the United Horse Shoe and Nail Company Limited case to which I referred earlier the House of Lords held that in assessing damages for infringement on loss of sales basis it is beside the point that the defendant could have arrived at the same result by lawful means, i.e. without infringing the plaintiff's rights by selling a non-infringing article, and it seems to me that the same principle must apply in determining what is a proper rate of royalty to be paid by an infringer when assessing damages on the basis of a notional royalty in a case where there has been no actual licensing of the patent. 
To my knowledge, since Catnic there has been no reported patent decision from the U.K. repudiating Justice Falconer's analysis in that case.  I was taken aback, then, why I read in the AIPPI U.K. Group's Report on Relief in IP Proceedings Other than Injunctions or Damages the following statement (at p.10; emphasis added, footnotes omitted): 
When a normal rate of royalty would not have been possible, the Courts may order damages to be assessed by what price could reasonably have been charged for permission to carry out the infringing acts (the 'User Principle').  The Court will consider the appropriate sum to be the amount the infringer would have paid if both parties (acting reasonably), with their actual strengths and weaknesses, had bargained as willing licensor and licensee.  The English Courts will take into account there was a potential non-infringing alternative to using the IPR holder's rights when considering the damages payable.
(Readers may recall that I've published two posts on AIPPI Q236, here and here, and I intend to post one or two more in the near future.  AIPPI Q236 is not limited to patent cases, but rather discusses all types of IP cases)  The case cited in support of this last sentence is 32Red Plc v. WHG (International) Ltd, [2013] EWHC 815 (Ch) (I.P. High Court 2013). This case is available online here.  It's a trademark infringement case, and it follows the teaching of a case involving an alleged misuse of confidential information, Force India Formula One Team Ltd v. Malaysia Racing Team Sdn Bhd, [2012] EWHC 616 (Ch) (High Court 2012) (available here).  In the latter case, which is quoted by Justice Newey in 32 Red Plc, Justice Arnold states as follows:
  1. This leaves two specific issues to be resolved. Counsel for Force India relied upon the principle stated by Lord Macnaghten in the context of patent infringement in United Horse Shoe & Nail Co Ltd v Stewart (1888) 5 RPC 260 at 268:
  2. "The decision in the patent action and the minute of admission in the present case establish beyond question that in selling the 'Shoe' brand nails, the respondents infringed the appellants' rights. The sale of each and all of those nails was unlawful. It appears to be beside the mark to say that the respondents might have arrived at the same result by lawful means, and that, without infringing the appellants' rights, they might have produced a nail which would have proved an equally dangerous rival of the 'Globe' nail. The sole question is, what was the loss sustained by the appellants by reason of the unlawful sale of the respondents' nails? The loss must be the natural and direct consequence of the respondents' acts."
    This principle has been regularly applied in patent cases since then.
  3. Counsel for the Corporate Defendants argued that this principle only applied to the first type of case identified by Lord Wilberforce in General Tire v Firestone [i.e., lost profits], and not to the third type of case [reasonable royalties]. More importantly, he submitted that, whatever might be the position with respect to patent infringement, the principle certainly did not apply to the third type of case in a breach of confidence claim. He argued that, as a matter of logic, in assessing the licence fee or royalty that would be negotiated between a willing licensor and willing licensee each making reasonable use of their respective bargaining positions, the availability or otherwise of the information from an alternative, lawful source was a highly material consideration. He further argued that, as a matter of authority, this analysis was supported by Seager v Copydex (No 2) and Dowson & Mason v Potter. Counsel for Force India had no convincing answer to this submission, and I accept it.
The two cases cited in paragraph 426, Seager v. Copydex (No 2), [1969] W.L.R. 809 (Ct. App.), and Dawson & Mason v. Potter, [1986] W.L.R. 1419 (Ct. App.), are also cases involving alleged breaches of confidence.

So, what is the state of the law in the U.K. on the status of noninfringing alternatives in patent cases in which the plaintiff seeks a reasonable royalty? Presumably future case law will tell us, but it is certainly true that United Horse-Shoe is not directly on point, since it dealt with reasonable royalties, and (I assume) courts are not obligated to follow Catnic, which is a Patent Court (that is, trial court) case.  As I noted in another recent post, one of the other holdings of the court in Catnic, that punitive damages are not available for patent infringement, is also likely not an accurate statement any longer of English law.  More importantly, perhaps, ignoring noninfringing alternatives for the purpose of calculating reasonable royalties is simply bad economics, and does not appear to be the law in other major patent systems.  All of this should weigh in favor of overruling Catnic on this point in some future case.

Monday, March 17, 2014

Two interesting recent U.S. cases on patent remedies: or, why can't U.S. patent courts be more like antitrust courts?

(Note:  Due to my failure carefully to proofread the first paragraph of this post, the version originally published yesterday contained an inadvertent ambiguity concerning whether the royalty awarded for past infringement should be the same as or higher than the royalty awarded for past infringement.  I have now corrected that ambiguity.)

Both of these were recently highlighted on the Patently-O Blog, but I thought I should add my two cents' worth to the mix.  The first case, Virnetx Inc. v. Apple Inc., Case No. 6:13-CV-211 (E.D. Tex. Feb. 25, 2014), available here, involves the question of whether, in a case in which a court (applying the eBay factors) denies a permanent injunction and awards an ongoing royalty, the ongoing royalty should be based on a rate that is the same as or higher than the royalty awarded for past infringement. From an economic perspective, the answer is pretty clear:  it should not be higher than the royalty awarded for past infringement.  If the point of awarding an ongoing royalty is to avoid patent holdup (i.e., the defendant is unable to cease infringing immediately without pulling its product off the market, and therefore if an injunction is issued the patentee can demand an extortionate postjudgment royalty)  it doesn't make much sense to award a higher royalty that effectively replicates the impact of an injunction.  In addition, given that the trier of fact has already determined the amount of a reasonable royalty based upon the assumption that the patent is valid and infringed, we really don't have any changed conditions postjudgment that require an alteration of that amount.  Finally, to award enhanced damages with respect to the ongoing royalty on the premise that the postjudgment infrigement is willful, as Judge Davis did here, simply compounds the error.  

Both Mark Lemley (in his paper Ongoing Confusion over Ongoing Royalties, available here) and I (in various places, including at page 13 of this paper) have made these points before, so there's really nothing theoretically new here.  The distressing part is that, in deciding patent matters, U.S. courts sometimes seem completely oblivious to anything more than the crudest form of economic reasoning (patents increase incentives to invent, therefore stronger patent rights are better!) in a manner that is completely at odds with the high level of economic sophistication that courts often bring to bear in antitrust matters.  Given that I.P. law, particularly patents, are just another form of economic regulation, properly viewed as complementary to antitrust law, this disconnect between legal doctrine and economic reasoning has never made any sense to me; yet despite some improvements in certain areas of patent law it never quite seems to go away.  

The other case is Suprema, Inc. v. ITC, __ F.3d __, 2013 WL6510929 (Fed. Cir. Dec. 13, 2013), in which the Federal Circuit held that the International Trade Commission lacks the power to enter an exclusion order against the importation of a good that itself does not infringe but that is intended to induce infringement within the United States.  The ITC and the patentee are seeking a rehearing en banc.  I don't have a strong feeling one way or the other one this particular issue at present, other than my background premise that the ITC--a separate investigatory and adjudicative body that enforces border measures against infringing goods' entry into the United States, and that to my knowledge has no parallel in any other country except South Korea--is an unnecessary adjunct to the normal U.S. district court system for litigating patent disputes.  For further discussion of what I view as the ITC's unjustifiable exceptionalism, see here and here.   

Saturday, March 15, 2014

New Book: Patent Law in Global Perspective, edited by Professors Okediji and Bagley

My colleague Ruth Okediji and University of Virginia Professor Margo Bagley have just published a new edited volume, Patent Law in Global Perspective (Oxford Univ. Press 2014).  The volume contains articles on a wide variety of topics by well-known patent academics including not only Professors Okediji and Bagley but also Rochelle Dreyfuss, Arti Rai, Dan Burk, and Christopher Heath (among many others).  Part Five of the volume includes five papers grouped under the heading "TRIPs Compliance, Patent Enforcement, and Patent Remedies," including my own A Research Agenda for the Comparative Law and Economics of Patent Remedies, which offers something of a foretaste of what was to become my book Comparative Patent Remedies.  (Because there are so many contributors, these edited volumes sometimes can take a long while on the journey from conception to publication.)  I'm happy the book is out and I hope it sells well.

Thursday, March 13, 2014

AIPPI Q236: Relief in IP Proceedings Other than Injunctions or Damages, Part 2

As I mentioned in my first post on this topic a couple of weeks ago, in 2012 AIPPI (the Association Internationale pour la Protection de la Propriété Intellectuelle, or International Association for the Protection of Intellectual Property) posed a range of specific questions, supplemented by Working Guidelines, to its member groups relating to various forms of "additional relief" that may be available in IP proceedings (including, but not limited, to patent cases).  According to AIPPI, these forms of additional relief may include, among other things, "seizure of infringing goods, delivery up and destruction of infringing goods, rectification, publication of the court’s judgment and declaratory relief. In addition, there may be other forms of monetary relief than damages, e.g. account of profits where the infringer is asked to surrender the profits earned as a result of the IPR infringement. . . . Alternatively, the plaintiff may obtain an award of monetary reparation for moral tort or an award of reasonable royalty based on unjust enrichment law. Finally, in addition to these more general forms of relief, there are also other forms of relief which are heavily fact specific, e.g. alteration of infringing goods such as change/removal of packaging, and modifications to technology by way of a workaround."  

Following submission of the member group reports, AIPPI published a summary of the reports and approved a resolution at its September 2013 meeting in Helsinki. (All of these documents are available here.)  Here is the full text of the resolution:
Noting that:
1) AIPPI has studied issues related to injunctions (Q219, Q215, Q214, Q204/204P, Q134, Q86 and Q80),
2) AIPPI has also studied issues related to damages (Q203, Q186, Q71),
3) AIPPI has not previously studied, as a dedicated question, forms of relief available in cases of infringement of IPRs other than injunctions and damages (additional relief). Additional relief may, in particular, include declaratory relief, delivery up/surrender of goods, destruction, rectification, alteration of infringing goods, corrective advertising, publication of judgments, orders to provide information, and monetary relief (other than damages),
4) This resolution concerns additional relief available in inter partes proceedings of a court or applicable administrative body (collectively, courts) following a finding on the merits of the case.
Considering that:
1) The TRIPS Agreement provides in Part III Section 2 for certain forms of additional relief, in particular evidence (Article 43), disposal or destruction (Article 46) and information (Article 47),
2) There is broad support for the proposition that various forms of additional relief should be available, that already being the case in most jurisdictions, and harmonizing the availability of additional relief furthers the creation of effective and appropriate means for enforcement of IPRs,
3) Additional relief should be used to achieve a fair and just result, having regard to the circumstances of the jurisdiction and the case,
4) It creates legal certainty and reinforces an effective system for IPR enforcement for all parties to understand the basis on which, in practice, additional relief has been awarded or refused,
Resolves that:
1) It should be the right and responsibility of the IPR holder to request the relief it believes to be appropriate to the circumstances of the case,
2) Courts should have the power to award additional relief for infringement,
3) In relation to monetary relief (other than damages), courts should have the power to award accounts of profits, reasonable royalties and/or reparation, in each case in jurisdictions in which the concept of damages does not already include them
4) Courts should also have the power to award legal costs,
5) All forms of additional relief should be available in principle for all forms of infringement against all infringers, but the decision on whether and what is awarded or refused should be made on a case-by-case basis,
6) Where the grant of additional relief is contested, courts should give reasons for awarding or refusing additional relief, such reasons being sufficient to understand the rationale,
7) The reasons for awarding or refusing additional relief should in general be made available to the public (anonymised or not, in accordance with national practice),
8) Additional relief should be awarded or refused so as to achieve a fair and just result, having regard to the circumstances of the jurisdiction and the case,
9) Additional relief should be appropriate to the circumstances, reasonable, practicable, and proportionate,
10) Taken as a whole, damages, injunctions and additional relief should be effective to prevent and/or dissuade further infringement,
11) Courts may, in appropriate circumstances, take the interests of third parties into account, and may hear those third parties, when determining whether to award additional relief,
12) The award in a particular jurisdiction of an order requiring corrective advertising and/or publication of a judgment should have regard to whether and how, in that jurisdiction, judgments are made available to the public,
13) In relation to an order for corrective advertising, in general it is preferable that:
a) courts’ procedures require that the party requesting the order also proposes wording, placement and costs, and effects its publication,
b) the party against whom the order is made pays the costs of publication.
I'll offer a few observations on the above and then return in more detail, in a future post or posts, to some of the specific matters that struck me in reading the member group reports and the summary report.   

First, as you can see from resolution (3), AIPPI recommends that countries authorize courts to award "accounts of profits, reasonable royalties and/or reparation, in each case in jurisdictions in which the concept of damages does not already include them." The Working Guidelines provide some background for this resolution:
33) Account of profits: . . .  Some jurisdictions treat profits made from infringing use of an IPR as a method of calculating compensatory damages. Other jurisdictions recognise a difference between damages and an account of profits. . . .  The Groups are invited to identify whether account of profits (or any monetary remedy) is available as a separate and/or alternative remedy to damages in their country.
34) Reasonable royalty:  while actually a measure of damages, a court (or applicable administrative body) may sometimes award monetary relief measured on the basis of a presumed licence fee or reasonable royalty rate as if the IPR holder and infringer had entered into a voluntary licensing arrangement. . . . As for account of profits, the Groups are invited to explain whether a reasonable royalty is merely a measure of damages in their jurisdiction or is available as a separate and/or alternative form of monetary relief.
35) Reparation: generally, the making of amends for wrong or injury done.
The question of whether awards of infringer's profits or reasonable royalties should be viewed as "damages" (or as a remedy for unjust enrichment, or as restitution, or as something sui generis) can be an important one, for a variety of reasons. From an economic perspective, for example, an award of the defendant's profits might seem like an overly crude tool for estimating the plaintiff's actual damages, and yet be defensible as a means for attaining optimal deterrence.  Moreover, because of the peculiarities of legal doctrine as its exists in different countries, classifying these remedies one way or the other may affect matters such as the statute of limitations or the right to trial by jury.  These are some of the issues to which I will return in greater depth in a future post or posts.

Second, some of the resolutions (including resolutions (3), (4), and (11)) state merely that courts shall have the power to do certain things without laying down any very specific conditions for the exercise of that power.  Perhaps the AIPPI members view the ability to tailor those conditions to a particular country's legal traditions and policy choices as an important matter, or simply prefer to keep things flexible.  See, e.g., Summary Report p.16 (stating that, in response to the question "What should the criteria be for the grant of the types of Additional Relief identified in response to question 11?", "While just under one-quarter of the Groups did not provide a substantive response to this question 12, those that did highlighted a number of related themes, such as the desirability of giving the court . . . sufficient discretion to order relief appropriate in the circumstances of the case, ie appropriate relief where infringement is established but achieving a result variously described as 'fair and just', 'appropriate, reasonable and practicable', proportionate, effective to prevent infringement or generally complying with the principles expressed in the European Directive.")  I also imagine it would have been quite difficult to achieve consensus on something more specific with regard to these points.  Still in all, for better or worse some of these resolutions seem rather vague.

Third, resolution (10) appears to contemplate that additional relief may sometimes be justified in view of a deterrence rationale, though without spelling out whether courts may award additional relief solely for purposes of deterrence.

Anyway, as noted I'll be back with some more thoughts on matters addressed by Q236 in a subsequent post or posts.