Tuesday, March 31, 2015

Initial Thoughts on the Oral Argument in Kimble v. Marvel Enterprises

The transcript of oral argument is now available, here.  As I noted earlier today, the issue presented is "Whether this Court should overrule Brulotte v. Thys Co., which held that 'patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.'"  (Note that I joined one of the amicus briefs in support of the petitioner, urging the Court to overrule Brulotte.  For my previous blog posts and for access to the briefs filed in this matter, see herehere, here, here, here, and here.)

Arguing for the petitioner Kimble, Roman Melnik faced questions from Justices Kagan and Sotomayor on stare decisis, with Justice Kagan stating that overruling a previous decision normally requires "special justifications .. . more than that the decision is wrong" (p.15) or "based on what we now view to be naive economics" (p.19), such as that the rule is "unworkable" or "completely anomalous" (p.16).  (She also argued that there are ways to draft around Brulotte, to which Mr. Melnik responded that, even if that is the case, "if you're prohibiting something that doesn't make sense, the initial question should be why are you prohibiting it? (pp. 6-7)).  Mr. Melnik's principal response to the stare decision argument was that since Brulotte the Court has abandoned the presumption that patents confer market power and has moved away from per se rules; and that experts in the field have a "a much more nuanced understanding of the economics of post-expiration royalties." Mr. Melnik also noted that even in the patent arena the Court has not always bowed to the force of stare decisis, citing Blonder-Tongue, a 1971 case in which the Court held that, once an infringement defendant succeeds in proving patent invalidity, the patent owner is precluded from relitigating the patent against someone else, thus reversing the then-governing rule in patent cases.  Justice Breyer seemed concerned that overruling Brulotte would contravene the Constitutional and statutory rules that patents be for limited terms, and posed a hypo in which the patentee has licensed all 55 persons who would be able to use the patent; but here Chief Justice Roberts noted that even if there were contracts requiring licensees to pay postexpiration royalties, postexpiration anyone else would be free to compete against the licensees (a point he came back to during respondent's argument), and Mr. Melnik noted that the petitioner was not advocating a rule of per se legality.  Justice Breyer nevertheless seemed concerned about the administrative costs of  applying the rule of reason, as opposed to a "simple rule" (p.20).  In response, Mr. Melnik noted that the rule of reason typically does apply to allegations of patent misuse, and provided an example from the Hovenkamp, Janis, Lemley & Leslie treatise of when postexpiration royalties would violate antitrust's rule of reason.

Arguing for the respondent, Thomas Saunders pressed the stare decisis point, contending that it should be for Congress, not the Court, to overrule Brulotte.  Chief Justice Roberts responded with a list of antitrust cases the Court has overruled, stare decisis notwithstanding (p.25), to which Mr. Saunders countered that the patent act is different from the antitrust laws, with Congress revisiting the patent laws 33 times since 1952.  (But Congress has amended the antitrust laws from time to time as well . . . Still, I understand the point that in the U.S. the antitrust statutes say very little, and are viewed as authorizing the courts to create a body of common-law competition law norms.  But much of patent law is judge-created common law as well.  And in any event, should stare decisis be applied differently when the issue is one of common law as opposed to statutory intepretation?)  Mr. Saunders also referred to protecting "reliance interests," as discussed in one of the amicus briefs, though Justices Ginsburg, Scalia, Sotomayor seemed skeptical about the force of that argument in the context of postexpiration royalties, with Justice Scalia providing a pointedly funny riposte:  "The only person I think we could be disappointing is the person who knows of this exotic law and enters a contract which provides for posttermination payments knowing that that will be invalid. Now, him we would disappoint, wouldn't we?" (p.27).  Chief Justice Roberts also noted that "the economists are almost unanimous that this is a very bad rule" (p.29).  Mr. Saunders responded with a cite to an article by William Baxter (President Reagan's appointee to head the the Antitrust Division, and a Chicago-School enthusiast), but the Chief Justice shot back with "What's the date of that article?"  Answer:  "1966."  Justice Kennedy also took up the point about drafting around Brulotte, stating "doesn't that cut against you as much as it cuts in your favor?" (p.30).  Mr. Saunders, however, responded to Chief Justice Roberts's observation that anyone other than the contractually-bound licensee could practice the patent post-expiration free and clear by asserting "the patent policy interest in a completely free public domain"(p.32).  (My own view is that, if a "completely free public domain" is the relevant policy, then Brulotte is consistent with it, but then what is the rationale for that policy in a case where a party has freely agreed to pay a postexpiration royalty?  To go back to antitrust analogies, every contract is a restraint on trade in the sense that it precludes someone from doing something she would otherwise be free to do, but that's hardly a reason to outlaw all contracts.)  

Arguing for the United States, Malcolm Stewart returned to the issue of Brulotte serving patent policy, and cited other decisions for the proposition that even when "a single licensee is restricted in his ability to use the formerly patented invention, it's not only he who suffers; it's the consuming public who could otherwise hope to buy the products he manufactures" (p.40).  Justice Sotomayor asked whether Mr. Stewart took issue "with the economic theory of all of the amici that have filed in the antitrust areas saying this makes no sense . . . economically," to which Mr. Stewart responded that he would, partially, because "at least some of the criticisms are based on the misconception that Brulotte prohibits extending royalty payments out past the date of patent expiration, and Brulotte properly understood . . . prohibits royalties that accrue based on post-expiration use, but it doesn't prohibit the post-expiration payment of royalties that are calculated based on use during the patent" (p.41).  (As Mr. Melnik suggested earlier, however, prohibiting the payment of royalties that accrue later may make it more difficult "to shift the risk of commercialization failure and innovation failure from the licensee to the licensor" (p.5)).  Justice Scalia asked what the benefits of the rule are, and Mr. Stewart responded that the licensee could decide how to exploit the invention without "any disincentive created by the obligation to pay royalties" (p.43).  Mr. Stewart also came back to Lear v. Adkins, the case in which the Court abandoned the principle of licensee estoppel (though in my view, that case is different in that the third-party effect of precluding the licensee from challenging patent validity is arguably much greater).  And he argued that post-expiration third parties may be faced with barriers to entry if they tried to exploit the now-expired patent, such that only the contractually bound licensees will remain in the market. 

In rebuttal, Mr. Melnik stated that, as an alternative to abandoning Brulotte in favor of the rule of reason, the Court could craft a test that focused on whether the licensee was coerced into entering into the postexpiration royalty agreement (p.48; see also p.14).  (Personally, I'm not so sure that a coercion-based test would be the right one; it seems like that could open up a can of worms.  Mr. Saunders' alternative to his preferred position was a rule of presumptive illegality (p.35), which however I also think would be a mistake.)   

It's always difficult to predict these things, but based on the tenor of the oral argument I'd guess that there is a majority to overrule Brulotte, with Justices Kagan and Breyer dissenting.  The Chief Justice and Justice Scalia seem to favor overruling, and my reading of their remarks leads me to think that Justices Ginsburg, Sotomayor, and Kennedy will side with the Chief and Justice Scalia (though of course I could be wrong).  Justice Thomas, as is usual, didn't ask any questions, and neither did Justice Alito; I don't see any indication on the docket sheet provided by the Scotus Blog that either of them recused themselves. 

And by the way:  Here's the transcript of oral argument in the other patent case argued today, Commil USA, LLC v. Cisco Systems, Inc., on the question of "Whether the Federal Circuit erred in holding that a defendant's belief that a patent is invalid is a defense to induced infringement under 35 U.S.C. § 271(b)."  I'm inclined to expect a reversal here as well, but we'll see.

U.S. Supreme Court Hearing Oral Argument in Two Patent Cases Today

Today as in, right now.  The first is Kimble v. Marvel Enterprises, where the question presented is "Whether this Court should overrule Brulotte v. Thys Co., which held that 'patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.'"  I've blogged about this case several times, most recently here, and will return later today if possible with some analysis of the oral argument.  The other case is Commil USA, LLC v. Cisco Systems, Inc., in which the question presented is "Whether the Federal Circuit erred in holding that a defendant's belief that a patent is invalid is a defense to induced infringement under 35 U.S.C. § 271(b)."  I mentioned this case in my blog post last week on Smith & Nephew v. Arthrex.  I predict a reversal in both cases, but will be interested to see how the oral argument proceeds.

Monday, March 30, 2015

Lee and Melamed on Patent Damages; Elhauge on RAND Commitments

1.  William F. Lee and A. Douglas Melamed have posted a paper on ssrn titled Breaking the Vicious Cycle of Patent DamagesHere is a link to the paper, and here is the abstract:
Patent law is implicitly, and sometimes explicitly, based upon a story of patent infringement in which technology users are presumed to be able to discover relevant patents in advance and either design around them or negotiate patent licenses before using the patented technology. That story does not hold true in many fields today, in which the scope and diffusion of potentially relevant patents renders such preclearance both infeasible as a practical matter and undesirable as a matter of economic policy. But patent damages law continues to apply this outmoded paradigm. As a result, current doctrine perpetuates a vicious cycle of excessive, socially harmful remedies.
We propose a number of ways for patent law to adapt to this new reality. First, reasonable royalty rates should be based on the market value of the patent before infringement and should exclude post-infringement considerations such as lock-in that infect current doctrine and lead to exaggerated damages awards. Second, patent remedy law should distinguish between infringers in the paradigmatic story, who can be regarded as guilty infringers, and innocent infringers for whom preclearance was not practicable; and it should further distinguish between patent holders that were willing to license their patents before infringement and those that had resolved to maintain their patent monopoly. In effect there are four combinations — innocent/willing, innocent/unwilling, guilty/willing, and guilty/unwilling. Remedies should depend on which combination is at issue, and injunctions should be available only for unwilling licensors. In the innocent/unwilling scenario, the patent holder should be able to obtain an injunction only if it agrees to bear the innocent infringer’s costs of switching to a non-infringing alternative.
I probably will have some comments on the paper after I have finished reading and digesting it.  Mr. Lee of WilmerHale is counsel to Apple in the Apple v. Samsung litigation.  Mr. Melamed, the coauthor of one of the most famous law review articles of all time, formerly was a partner at WilmerHale and general counsel at Intel, and is now a visiting professor of law at Stanford.

2. A year or so ago I mentioned (here) that Professor Einer Elhauge had posted a draft paper on ssrn titled Treating RAND Commitments Neutrally.  The final version of the paper is now out, in the Journal of Competition Law & Economics (available here).  Here is the abstract:
This article argues that the same legal standards should apply to RAND commitments whether they are made to standard-setting organizations or not. The arguments for concluding that RAND commitments should limit injunctive patent relief or trigger antitrust liability turn on whether the commitment reasonably induces lock-in that generates hold-up effects or market power when that commitment is breached. But RAND commitments can induce such lock-in effects when they are made outside of standard-setting organizations and do not always induce them when they are made to standard-setting organizations. Thus, any special legal rules for RAND commitments should turn on whether the commitments induced such lock-in, rather than on the institutional context. The arguments against using special legal rules for RAND commitments turn on the extent to which lock-in might fail to generate holdup problems, denying patent injunctions might generate reverse-holdup problems, and contract or promissory estoppel remedies might obviate the need for antirust liability. But those arguments likewise apply equally inside and outside of standard-setting organizations. Thus, however one resolves the arguments for and against applying special legal rules to RAND commitments, the resulting legal standards should be the same whether or not the commitment is made to a standard-setting organization. 

Thursday, March 26, 2015

Federal Circuit Punts, For Now, on Revisiting the Standard for Enhanced Damages

As noted in previous posts (here and  here), in some of its recent decisions the Federal Circuit has continued to apply the framework it announced in In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc), and Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., 682 F.3d 1003 (Fed. Cir. 2012), cert. denied, 133 S. Ct. 932 (2013), for determining whether an infringement was "willful" (and thus under the governing interpretation of  35 U.S.C. § 284 potentially subject to an award of "up to three times" actual damages), notwithstanding some doubts expressed by Judges O'Malley and Hughes whether that framework remains good law after the U.S. Supreme Court's decisions on attorneys' fees in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014), and Highmark Inc. v. Allcare Health Mgt. Sys., 134 S. Ct. 1744 (2014).  In brief, the current framework requires, as a predicate to a possible award of enhanced damages, that the prevailing patentee establish, by clear and convincing evidence, that the defendant "willfully" infringed by acting "despite an objectively high likelihood that its actions constituted infringement of a valid patent. . . . If this threshold objective standard is satisfied, the patentee must also demonstrate that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer.”  Seagate, 497 F.3d at 1371.  In addition, despite the court's one time characterization of willfulness generally as a question of fact, under Bard willfulness is a question of law (that is, for the judge to decide), subject to de novo review on appeal.  A potential difficulty arises because, until recently, the court applied a similar framework for evaluating whether a case was "exceptional" under § 285 and therefore potentially meriting an award of attorneys' fees; but in 2014 in Octane Fitness and Highmark the Supreme Court held instead that "[d]istrict courts may determine whether a case is 'exceptional' in the case-by-case exercise of their discretion, considering the totality of the circumstances"; that the normal evidentiary burden of preponderance of the evidence, not the higher clear and convincing evidence standard, applies to this determination; and that the standard of review on appeal is abuse of discretion, not de novo review.  

Given the Federal Circuit’s policy over the last decades to construe the “exceptional case” and willfulness standards in a similar fashion, the question therefore arises whether the current standards for determining willful infringement remain valid.  Nevertheless, on Monday of this week the court denied a petition for rehearing en banc in Halo Electronics, Inc. v. Pulse Electronics, Inc. in which Halo presented for en banc review the question (as phrased by Judge Taranto) "whether the objective reasonableness of Pulse’s invalidity position must be judged only on the basis of Pulse’s beliefs before the infringement took place."  Aside from the brief per curiam order denying review, there are two separate opinions. The first (authored by Judge Taranto and joined by Judge Reyna), recognizes the multiple questions that now surround the court's willfulness jurisprudence, but concludes that Halo's petition does not raise a question meriting en banc review:
. . . Halo has not demonstrated the general importance of [the question quoted above] or that the panel’s assessment of objective reasonableness is inconsistent with any applicable precedents or produces confusion calling for en banc review. . . . Indeed, the panel’s approach to objective reasonableness—as negating the objectively high risk of harm (here, infringement) needed for willfulness—is strongly supported by Seagate and by the Supreme Court’s authoritative Safeco decision addressing the meaning of “willfulness” in non-criminal contexts. And that conclusion is not affected by Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), which does not address the term “willful” at all.
Those are sufficient reasons to deny further review here. Doubtless we will receive various requests for en banc review of some or all of the many possible § 284 questions in other cases. The standard for granting en banc review is necessarily a demanding one. We must apply the standard to particular issues in particular cases. Unlike Congress, we may not convene to clean the slate and write a set of rules that answer the host of questions about which § 284 is, at present, silent.
Dissenting, Judge O'Malley, joined by Judge Hughes, writes that
For the reasons detailed in my concurrence at the panel stage—Halo Electronics, Inc. v. Pulse Electronics, Inc., 769 F.3d 1371, 1383–86 (Fed. Cir. 2014) (O’Malley, J., concurring)—and reiterated here, I believe the full court should hear this case en banc to reevaluate our jurisprudence governing an award of enhanced damages under 35 U.S.C. § 284.
Also on Monday, the court released a revised version of its opinion (authored by Judge Prost and joined by Judges Newman and Hughes) in Stryker v. Zimmer (see my previous blog post here).  Unless I'm missing something, the only revision is the addition of the following footnote to page 18:
This court has not yet addressed whether Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), or Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744, 1746 (2014), altered the standard of review under which this court analyzes the objective prong of willfulness. However, as the district court failed to undertake any objective assessment of Zimmer’s specific defenses, the district court erred under any standard of review and thus this court need not now address what standard of review is proper regarding the objective prong of willfulness. 
I think it's fair to say that the law of willful infringement will be "in play" over the coming months.  For other discussion of these cases, see Jason Rantanen's excellent post on Patently-O.

Wednesday, March 25, 2015

Indian Court Grants Ericsson an Interim Injunction Against the Infringement of Alleged SEPs

At SpicyIP, Kartik Chawla has published what appears to be the first of a two-part series on Telefonaktiebolaget LM Ericsson v. Intex, in which Justice Manmohan Singh of the Delhi High Court issued an interim injunction on March 13.  Although I haven't waded through the entire 257-page opinion just yet, it appears that an important consideration was the court's conclusion that the defendant was not a willing licensee (see paragraph 147).

Tuesday, March 24, 2015

Petitioner's Reply Brief in Kimble v. Marvel Enterprises

The petitioner's reply brief in Kimble v. Marvel Enterprises--the case in which the Supreme Court has been asked to overrule its 1964 decision in Brulotte v. Thys holding agreements to pay postexpiration patent royalties per se unenforceable--has been filed and is available here.  From the introduction:
At bottom, Marvel and the government each invite this Court to retain a per se rule that makes no economic sense and hampers innovation on the basis of a formalistic and cropped view of patent policy that itself does not survive closer examination. Brulotte should be overruled.
The case is scheduled for oral argument one week from today, on March 31, 2015.  For previous blog posts and links to the other briefs that have been filed in the case, see here, here, here, here, and here.

Monday, March 23, 2015

A Study of Reasonable Royalty Awards in Japan

I mentioned back in December that Professor Masabumi Suzuki of Nagoya University in Japan had brought to my attention a paper titled Predictability of Monetary Damages under Article 102(3) of the Japanese Patent Law which was recently published (in Japanese) by the Second Subcommittee, the Second Patent Committee, in 64 Intellectual Property Management 219 (2014).  My research assistants Gina Rhee and Takamasa Nakahara have now provided me with a rough translation of the article, which attempts to delineate and, to some degree, quantify the factors that go into awards of reasonable royalties in Japanese patent litigation.

To provide a little background, under article 102(3) of the Japanese Patent Act "A patentee or an exclusive licensee may claim against an infringer compensation for damage sustained as a result of the intentional or negligent infringement of the patent right or exclusive license, by regarding the amount the patentee or exclusive licensee would have been entitled to receive for the working of the patented invention as the amount of damage sustained."  As I discuss in my book, however, prior to 1999 the relevant text included the word tsujono ("normally"), meaning that royalties would be measured by the amount the patent owner "normally" would have derived from licensing the invention.  That word was removed out of concern that it influenced "courts to rely heavily on previous licenses granted by the patentee, license rates paid for the use of government inventions, and published royalty rates compiled for particular industries," and that "these awards tended to undercompensate patentees and to encourage infringement" (p.311).  Anyway, the above study involved an examination of 68 cases from January 1, 1999 to March 5, 2013, in which courts awarded reasonable royalties pursuant to article 102(3).  (I believe this is intended to be comprehensive, not just a random sample of such cases.)  The authors show that, as I reported previously, courts awarded a 5% rate in 28% of the cases, 3% in 22% of the cases, and 10% in 16% of the cases.  (It appears, if I am not mistaken, that the rate is applied to the defendant's turnover of infringing products.  No need to be concerned about the entire market value rule in a system without juries!)  Comparing these data to survey evidence from 1992 and 2002, it appears that awards of 3% are less prevalent than in 1992 but more so than in 2002; while 5% and 10% rates are more common than in 1992 and about the same as reported in 2002.  (There may be some overlap, though, between the cases reflected in the 2002 survey and the cases the authors analyzed, some of which go back as far as 1999.)  Altogether, during the period under consideration, there were five cases in which the award exceeded ¥200,000,000 (U.S.$1,660,000 at current exchange rates); the vast majority were under ¥100,000,000.

Based on their analysis of these cases, the authors develop a formula to help predict the rate a court will award in a given case.  In 11 of the cases there were comparable licenses involving the same or another patent, which provided a starting point for the calculation; in most of the remaining cases, courts used as a starting point the standard rate for a given technological field as reported by the Japanese Institute of Inventors and Innovation (Hatsumei Kyokai) in the fifth edition of this book.  (See also the discussion in my book of the use of standard rates, at p.311 n.100.)  The authors uncover various positive factors (e.g., "the technical or economical value and importance of the invention," the plaintiff's own high profit margin, or the substantial contribution of the invention to the defendant's profitability) and negative factors (e.g., the invention does not contribute much to the value of the end product, there are available alternatives, or the end product is a mass-produced, inexpensive one) that affect whether a court will depart upwards or downwards from the starting rate.  The authors then weight each of these factors depending on whether the factor relates to the invention itself, the patentee, the infringer, third parties, or something else, and adjust the starting rate accordingly.  Finally, they take this "imaginary rate" (the starting rate plus or minus its "adjustment value") and multiply it by a "sales coefficient."  The sales coefficient reflects the fact that lower rates are awarded where the turnover of the infringing product is high, and vice versa; there tends to be an inverse relationship between the two.  Overall, in 70% of the 54 cases to which this analysis was applied, the authors were able to predict the rate awarded to within one percentage point.  In addition, on the whole there were "more cases in which the awarded rate is actually higher than the license agreement rate," which probably makes sense given that the cases that result in damages awards all involve patents that have been adjudged valid and infringed.

For another recent article (this one in English) discussing patent damages in Japan, see Nodoka Nakamura's Recent Trends in Court Judgments Concerning Damages in Japanese Patent Infringement Litigations, A.I.P.P.I.--Journal of the Japanese Group of AIPPI 389 (Nov. 2014), which is based on  Ms. Nakamura's  review of court judgments handed down from January 1, 2003 to January 30, 2014, and listed in the appendix to the article.  For my blog post on this paper, see here.

Friday, March 20, 2015

New Papers by Sidak and Angeli on FRAND and Injunctions

1.  J. Gregory Sidak has published a paper titled The Meaning of FRAND, Part II: Injunctions.  It is available for download here.  Here is the abstract:
Under what conditions may the holder of standard-essential patents (SEPs) seek to enjoin an infringing implementer without breaching the SEP holder’s contract with the standard-setting organization (SSO) to provide access to those SEPs on fair, reasonable, and nondiscriminatory (FRAND) terms? I show that the SEP holder’s contractual obligations still permit it to seek an injunction. A FRAND commitment requires the SEP holder to offer a license for the SEPs on FRAND terms (or otherwise to grant implementers access to the SEPs). Extending an offer containing a price within the FRAND range discharges the SEP holder’s contractual obligation. Thereafter, the SEP holder may seek to enjoin an implementer that has rejected a FRAND offer. This analysis indicates the imprudence of categorically banning injunctions for the infringement of SEPs, as some scholars have advocated and as one of the world’s most significant SSOs—the Institute of Electrical and Electronics Engineers (IEEE)—had proposed, as of January 2015, in draft amendments to its bylaws. Such a ban would invite opportunism by implementers and is unnecessary. Courts already can prevent opportunism by SEP holders by conditioning an injunction on the implementer’s actual or constructive rejection of a FRAND offer.
I may have more to say about this paper after I've had a chance to read and digest it.  As always, whether I ultimately agree with Mr. Sidak's views or not, it should be a stimulating paper. 

2.  Michela Angeli has published a paper titled Willing to Define Willingness: The (Almost) Final Word on SEP-Based Injunctions in Light of Samsung and Motorola, Journal of European Compettion Law & Practice (2015).  Here is a link to the paper, and here is the abstract:
The decisions adopted by the Commission in the Samsung and Motorola cases establish that seeking injunctions on the basis of a standard essential patent (‘SEP’) for which a commitment to license under FRAND terms and conditions has been given to a Standard Setting Organisation (‘SSO’) violates Article 102 TFEU, unless it can be shown that the implementer is not willing to enter into a license agreement on FRAND terms and conditions.
While waiting for the CJEU to clarify the law in the Huawei case, both decisions contribute to the identification of a possible ‘safe harbour’ for both SEPs implementers who want to be protected from injunctions and SEPs holders who want to avoid antitrust liability arising out of the use of SEP-based injunctions.
In line with the Commission decisions, Advocate General Wathelet in his opinion in Huawei—handed down on 20 November 2014—proposes steps a SEP holder should take before seeking injunctions in order not to violate Article 102 TFEU, as well as obligations the alleged infringer should comply with to be considered willing. 
Hat tip to Danny Sokol's Antitrust & Competition Policy Blog for bringing this one to my attention.

Wednesday, March 18, 2015

Damages for Indirect Infringement: Smith & Nephew v. Arthrex

This morning the Federal Circuit handed down an opinion in Smith & Nephew Inc. v. Arthrex, Inc (available here).  The litigation has had a somewhat tortuous history, including "three trials and two previous appeals" over a patent concerning "a method used by surgeons to anchor a suture in bone, thereby helping to attach (or reattach) tissue to the bone."  Smith & Nephew (S&N) alleged that Arthrex indirectly infringed "by selling certain SutureTak and PushLock anchors having attached sutures . . . that surgeons use to perform the claimed methods."  A 2011 retrial resulted in a jury verdict in favor of S&N, a lost profits damages award in the amount of $67,793,868, and a reasonable royalty in the amount of $16,987,556 for infringing uses that did not deprive S&B of sales.  The judge entered a JMOL for Arthrex, which was reversed on appeal; on remand, and over Arthrex's objections, the court reinstated the jury verdict which forms the basis of the present appeal. 

Much of the dispute centers on whether the district court was correct in precluding Arthrex from relitigating certain matters on remand.  The court affirms the trial court's judgment that Arthrex was not entitled to relitigate validity.  It concludes that the district court erred, however, in refusing to consider Arthrex's post-remand challenges to the lost profit award, but "[o]n the merits . . . reject[s] Arthrex’s contention that the lost-profits award lacks substantial evidence support. See Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1310 (Fed. Cir. 2009) (applying substantial-evidence review of factual findings within methodologically proper damages determination)."

The lost profits inquiry is complicated in that, again, the defendant is accused of indirectly infringing by selling anchors that surgeons used to directly infringe the patent; and there are substitute anchors the surgeons' use of which would not have resulted in the infringement of the method patent.  S&N's theory was that it was entitled to recover lost profits on sales it would have made of these substitute anchors, based on its share of the market: 
To establish entitlement to lost profits, “the burden rests on the patentee to show a reasonable probability that ‘but for’ the infringing activity, the patentee would have made the infringer’s sales,” Crystal Semiconductor Corp. v. TriTech Microelecs. Int’l, Inc., 246 F.3d 1336, 1353 (Fed. Cir. 2001), though not necessarily all of those sales. S&N put on evidence to show (a) what products constituted “acceptable noninfringing substitutes” for the Arthrex Bio-SutureTak, Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978), and (b) S&N’s percentage of sales of that class of acceptable non-infringing substitutes (considering all sellers, including Arthrex). It is not meaningfully disputed on appeal that, if S&N was correct as to (a), then S&N, having ample production capacity, was entitled to apply the (b) percentage to Arthrex’s infringing sales and to receive an award of the profits it would have made on that number of sales. See Ericsson, Inc. v. Harris Corp., 352 F.3d 1369, 1377 (Fed. Cir. 2003) (citing State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577–80 (Fed. Cir. 1989)) (endorsing a market-share approach). S&N’s expert presented that calculation to the jury, which adopted it.
The only aspect of the calculation meaningfully challenged by Arthrex on appeal is the identification of “acceptable non-infringing substitutes,” Panduit, 575 F.2d at 1156, by S&N’s expert as unduly narrow. We consider the evidentiary support for the jury determination bearing in mind that the object of the inquiry is to identify what products those surgeons who actually bought Bio-SutureTak anchors would have bought if Arthrex had not sold that product. And we also recognize that the inquiry typically “excludes alternatives to the patented product with disparately different prices or significantly different characteristics.” Crystal Semiconductor, 246 F.3d at 1356. 
On this issue, the court concludes that there was substantial evidence to support S&N's contention that "the class of acceptable non-infringing alternatives in this case consisted of anchors that were (1) bioabsorbable, (2) premounted on an inserter, (3) pre-loaded with a suture, and (4) inserted via a push-in or tap-in procedure," rather than a broader class including screw-in and toggle anchors proposed by Arthrex.  More specifically, "the S&N definition properly reflected the anchor features that matter for the lost-profits inquiry, namely, the features that mattered to the group of surgeons who in fact chose to use (and therefore controlled the buying of) the specific Arthrex product at issue. The jury could properly find that the preference for particular anchor characteristics revealed by the actual market behavior of those surgeons determined where those surgeons would have taken their business if they could not have purchased what they in fact bought."  Reviewing the record, the majority concludes that "The jury’s conclusion that surgeons chose anchors based on their insertion methods (and therefore that only press-in anchors were acceptable, non-infringing alternatives here) is supported by substantial evidence. The jury was free to disbelieve or discount Arthrex’s limited evidence pointing the other way."  The majority also was not persuaded by Arthrex's arguments about what it would have done but for the infringement, calling the evidence "scanty" and noting among other things that Arthrex was not actually a selling a noninfringing anchor during the relevant period. "The jury could find, given the dearth of evidence on the subject, that Arthrex would not have offered an acceptable non-infringing substitute in the 'but-for' world."

As for supplemental damages, “'[T]he amount of supplemental damages following a jury verdict is a matter committed to the sound discretion of the district court.” SynQor, Inc. v. Artesyn Techs., Inc., 709 F.3d 1365, 1384 (Fed. Cir. 2013) (internal quotation marks omitted).'"  Arthrex challenged the award of supplemental damages on the basis, inter alia, that during the time in between the JMOL and the reversal on appeal it had a good-faith belief that the sales it continued to make post-JMOL did not induce infringement of the patent in suit.  Implicitly noting that the issue of whether a good faith belief negates the state of mind necessary to sustain an judgment of induced infringement is currently before the Supreme Court in Commil USA, LLC v. Cisco Systems, Inc., the Federal Circuit rejected the challenge for the following reasons:
Whatever else may be said about Arthrex’s argument, the district court’s ruling and pronouncement could, at most, create a factual question, not an entitlement to a no-knowledge finding as a matter of law. But Arthrex does not request further factual adjudication, only a judgment as a matter of law of no indirect infringement for this period. We therefore reject Arthrex’s contention, without the need to consider more fully whether, as Arthrex suggests, liability for indirect infringement can turn successively off and on, based on the knowledge requirement, when a trial court reaches one conclusion but the conclusion is then reversed on appeal.
Judge Dyk dissented from the majority holding as it related to the lost profits award, based on his conclusion that substantial evidence did not support the characterization of push-in anchors as the only noninfringing alternative.

Addendum:  Upon re-reading the above this afternoon, I began to wonder if I had understood the plaintiff's damages theory correctly.  Was S&N requesting lost profits on lost sales of noninfringing push-in anchors (that is, push-in anchors the use of which would not result in the use of the method claim in suit, perhaps because they lack the necessary "intrinsic resiliency," see opinion p.3) that it would have sold, but for the infringement?  That's what I thought the court meant when it talked about "S&N's percentage of sales of that class of acceptable non-infringing substitutes," but then I wondered whether that meant that S&N was not selling any push-in anchors that could be used to practice the patented method.  A brief that S&N filed with the district court (2013 WL 5206244) now leads me to believe that S&N's position was that its BioRaptor product could be used to practice the patented method, so maybe what the court meant was that S&N's push-in anchors (which claimed 87.5% of the market for such products, according to Judge Dyk) were noninfringing, either because they weren't being used to practice the patented method or because their use for that purpose was authorized by S&N.  In the latter instance, I guess the court's use of the term noninfringing "substitutes" denotes substitutes for the defendant's product, not necessarily substitutes for the products that can be used to practice the method.  If any readers can clarify this point, I'd appreciate it.

Further Addendum:  I failed to note in my post yesterday that the above case is a nonprecedential opinion, and that the author is Judge Taranto.

Tuesday, March 17, 2015

Patent Remedies in Ireland

Lá fhéile Pádraig sona dhaoibh.  To my knowledge, there isn't a great deal of patent litigation in Ireland, and my book makes only a couple of passing references to Ireland.  Seeing how today is St. Patrick's Day, however, readers might be interested in taking a look at the remedies portions of Ireland's Patents Act (what better way to spend the holiday?).  Section 47 states:
(1) Civil proceedings for infringement of a patent may be brought in the Court by the proprietor of the patent in respect of any act of infringement which he alleges he is entitled under sections 40 to 43 and section 45 to prevent and (without prejudice to any other jurisdiction of the Court) in those proceedings a claim may be made—
(a) for an injunction restraining the defendant from any apprehended act of such infringement;
(b) for an order requiring the defendant to deliver up or destroy any product covered by the patent in relation to which the patent is alleged to have been infringed or any article in which the product is inextricably comprised;
(c) for damages in respect of the alleged infringement;
(d) for an account of the profits derived by the defendant from the alleged infringement;
(e) for a declaration that the patent is valid and has been infringed by the defendant.
(2) The Court shall not, in respect of the same infringement, both award the proprietor of a patent damages and order that he shall be given an account of the profits.
Other relevant provisions include sections 49(1) ("In proceedings for the infringement of a patent damages shall not be awarded, and no order shall be made for an account of profits, against a defendant who proves that at the date of the infringement he was not aware, and had no reasonable grounds for supposing, that that patent existed, and a person shall not be deemed to have been so aware or to have had reasonable grounds for so supposing by reason only of the application to a product of the word “patent” or “patented” or any word or words expressing or implying that a patent has been obtained for the product, unless the number of the relevant patent accompanied the word or words in question.") and 50(2) ("Where in proceedings for the infringement of a patent the plaintiff proves that the specification of the patent was framed in good faith and with reasonable skill and knowledge, the Court may grant relief in respect of that part of the patent which is valid and infringed, subject to the discretion of the Court as to costs and as to the date from which damages should be reckoned.").  The three provisions quoted are very similar to provisions found in sections 61 and 62 of the U.K. Patents Act, as discussed in my book at pages 184-85.

Monday, March 16, 2015

Reetz et al. on Injunctions Under the UPC Agreement

I mentioned last week (here) that Alexander Reetz, Camille Pecnard, Riccardo Fruscalzo, Ruud van der Velden, and Mark Marfé,had just published a paper titled Die Befugnisse der nationalen Gerichte unter dem EPÜ und des Einheitlichen Patentgerichts (EPG) nach Art. 63 (1) EPGÜ zum Erlass von Unterlassungsverfügungen--eine rechtsvergleichende Untersuchung (which I translated as "The Authority of National Courts Under the Unified Patent Agreement and of the Unified Patent Court according to Article 63(1) of the Agreement on the Unified Patent Court with respect to Granting Injunctions--A Comparative Investigation") in the March 2015 issue of GRUR/Int.  I had started to read the article in the original German when I discovered that an English-language version of the article (titled The power of national courts and the Unified Patent Court to grant injunctions: a comparative study) had become available in the current edition of the Journal of Intellectual Property Law and Practice (link here).  Here is the abstract:
Continental Europe and the United Kingdom give diverging answers to the question of whether the granting of a cease and desist order (‘permanent injunction’) in favour of the proprietor of a European patent (EP) may in a specific case be refused due to considerations of proportionality.

The authors discuss the differences between Continental Europe and the United Kingdom and argue that the future Unified Patent Court (UPC), under the Agreement on a Unified Patent Court (UPCA) and the 17th version of the Rules of Procedure (RoP), can make use of a pan-European ‘lowest common denominator’ when deciding whether proportionality should play a role in deciding on an injunction claim. 
The authors begin with a brief discussion of, principally, EC Enforcement Directive articles 11 ("Member States shall ensure that, where a judicial decision is taken finding an infringement of an intellectual property right, the judicial authorities may issue against the infringer an injunction aimed at prohibiting the continuation of the infringement") and 12 ("Member States may provide that, in appropriate cases and at the request of the person liable to be subject to the measures provided for in this section, the competent judicial authorities may order pecuniary compensation to be paid to the injured party instead of applying the measures provided for in this section if that person acted unintentionally and without negligence, if execution of the measures in question would cause him/her disproportionate harm and if pecuniary compensation to the injured party appears reasonably satisfactory").  In the authors' view, apart from article 12 the Directive (in article 3(2)) expressly recognizes proportionality as a rationale for restricting a court's power to grant a permanent injunction only for (1) abuse of right and (2) violations of competition law.  

They then proceed with a discussion of the law on injunctions in Germany, France, Italy, the Netherlands, and the U.K., stating that none of these countries have "invoked the option conferred by Article 12 of the Enforcement Directive to implement a proportionality requirement into their national laws."  Thus in Germany, the authors conclude, "there is no scope for a restriction for reasons of proportionality of the power to grant injunctions" and  injunctions must be granted, absent an abuse of right or competition law violation.  Similarly, in France "only in extraordinary circumstances have . . . courts to date refused to grant an injunction despite patent infringement being established," and in Italy as well "no . . . court has refrained from granting an injunction on the grounds of it being disproportionate in the specific case," though a minority of decisions have refused injunctions where "the patent infringement was discontinued and the risk of repetition was removed . . . ."  Dutch law did not transpose article 12 either, though under some circumstances a Dutch court will apply the abuse of right principle to preclude injunctive relief for the alleged infringement of SEPs (see, e.g., my post here).  

By contrast, under the law of England and Wales injunctive relief traditionally is viewed as discretionary in nature, involving, as a "starting point," application of the four Shelfer factors (see my post here).  Although some recent English precedent has indicated that courts nevertheless should award injunctions for the infringement of IP rights unless the grant would be "grossly disproportionate," a 2014 (non-IP) case from the U.K. Supreme Court (Coventry and others v. Larence and another [2014] UKSC 13) suggests "a more flexible approach should be taken by a judge, when asked to award damages instead of an injunction, than that suggested in recent cases. In such a situation, the judge should not have an inclination either way, and the outcome should depend on all the evidence and arguments."  In a subsequent 2014 High Court case involving trademark infringement (Comic Enterprises v. Twentieth Century Fox [2014] EWHC 2286 (Ch.)), the court "concluded that the question of whether to allow damages in lieu of an injunction requires a multifactorial approach, balancing the right of intellectual property against the right to freedom of expression and the right of the arts to be free from constraint."  Nevertheless, the authors do not read either of these latter two cases as departing from earlier precedent, and note that the burden remains on the defendant (in contrast to the U.S. eBay approach).

As for the UPC, the authors note that article 63(1) of the Agreement  on a Unified Patent Court (UPCA) states that "Where a decision is taken finding an infringement of a patent, the Court may grant an injunction against the infringer aimed at prohibiting the continuation of the infringement."  Understood in its proper context, however, the authors argue, the word "may" in article 63(1)
is to be understood in the sense of ‘shall have the authority to’. It cannot be derived from these provisions, directed at the Member States, that the court shall have the power to exercise decisionmaking discretion. In actual fact, these provisions are—in line with their purpose—to be understood merely as a task for the Member States to provide their courts with the legal power to grant injunctions. What is more, these provisions allow the legal tradition of each Member State to retain its ancestral habitat. . . .
. . . However, assuming that article 63(1) would confer a procedural discretion to the UPC for refusing an injunction where there is a finding of infringement, the case law of the courts of England and Wales would require that such argument for withholding an injunction must be exceptionally strong. In other words, Article 63(1) cannot be regarded as a decent ‘port of entry’ for the importation of a standard analogous to the US Supreme Court judgment in eBay.
Finally, towards the end the paper discusses Rule 118.2 of the 16th Draft of the Rules of Procedure of the Unified Patent Court, which states 
Without prejudice to the general discretion provided for in Articles 63 and 64 of the Agreement, in appropriate cases and at the request of the party liable to the orders and measures provided for in paragraph 1 the Court may order damages or compensation to be paid to the injured party instead of applying the orders and measures if that person acted unintentionally and without negligence, if execution of the orders and measures in question would cause such party disproportionate harm and if damages or compensation to the injured party appear to the Court to be reasonably satisfactory.
The authors note that this language "was taken almost word for word" from article 12 of the Directive.  They then argue that 
It is Rule 118.2 of the RoP—and not the UPCA—that attempts to provide for damages or compensation (hereinafter ‘alternative compensation’) instead of the injunction, as a separate claim according to substantive law. The Rules of Procedure, however, cannot do so. Rule 118.2 RoP is not ‘compliant’ with the UPCA (Art 41(1) sentence 2 UPCA), since it does not merely stipulate a ‘condition’ for the ordering of an injunction within the meaning of Articles 63 and 56(1) UPCA, thus clarifying the norm.
The point may be moot, however.  Presumably the paper went to press before the 17th Draft of the Rules of Procedure were out, and as I discussed here this past December, the 17th Draft (unfortunately, in my view) deleted Rule 118.2 altogether.  C'est la vie.

Friday, March 13, 2015

Friday Miscellany: TRIPs Enforcement of IP Rights, eBay, Recent Federal Circuit Damages Cases

1.  Because it touches on, among other things, IP enforcement under TRIPs, readers might be interested in a paper by Andrea Filipetti and Daniel Archibugi titled The Globalization of Intellectual Property RightsHere is a link to the paper, and here is the abstract:
There is a heated debated – in academia and in policy circles – about the usefulness of a stronger global regime of intellectual property rights (IPRs). Supporters of strong IPRs argue that they will increase investments in R&D and innovation and disseminating it across countries. Detractors respond that this would imply another burden on developing countries, making slower and more difficult their catching up. The introduction of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in 1994 has even further polarized these positions. We argue that the relevance of IPRs in facilitating or obstructing technology transfer has largely been exaggerated. Innovation-based development is neither hampered nor facilitated by strong or weak IPRs, but rather by the willingness to invest resources in R&D, education, and infrastructures. While TRIPS have effectively represented an attempt to generate a global regime of IPRs, its economic effectiveness has been rather limited since enforcement and policing of IPRs infractions are still firmly in the hands of national authorities.
2.  Ryan Holte has posted a paper on ssrn titled The Misinterpretation of eBay v. MercExchange and Why: An Analysis of the Case History, Precedent, and Parties, Chapman L. Rev. (forthcoming 2015).  Here is a link, and here is the abstract:
eBay v. MercExchange, 547 U.S. 388 (2006) is approaching a decade of citation and, in that time, the landscape for injunctions in patent infringement cases has changed dramatically. Can revisiting the case give us a better understanding of how the standards for injunctions should be understood post-eBay, perhaps in contrast to how they are understood? The purpose of this article is to extract that detail regarding the eBay injunction denial from primary sources. This research focuses solely on the injunction issue post-trial to case settlement. The article next assesses the impact of eBay on district courts, inventors, news stories, intellectual property investors, and others over the last decade. Finally, based in part on a review of court opinions considering permanent injunctions since eBay, and court citations to eBay’s concurring opinions by Chief Justice Roberts and Justice Kennedy, the article argues that the case has largely been misinterpreted by district courts and others for various reasons including: improper reliance on Justice Kennedy’s concurrence; misleading media coverage; eBay’s public relations efforts to spin media attention in its favor; a district court judge generally biased against patent owners and uniquely concerned with the wide disparities between the parties, the motives of MercExchange, and the vast consequences an injunction may bring against the world’s largest auction marketplace; and the fact that the case settled after the district court’s second denial of an injunction but before the Federal Circuit could revisit the issues. The article concludes by emphasizing that eBay should be cited for what the Court actually held, and not for how the case has been (mis)interpreted these last ten years.
3.  Brian W. Nolan and B. Clayton McCraw have published a paper titled In Dredging up the Past, the Federal Circuit Makes Patent Damages More Difficult to Prove; But Has It Left Some Avenues Open?, Bloomberg BNA Patent, Trademark & Copyright Law Daily, March 4, 2015 (available here, but behind a paywall).  The authors discuss recent Federal Circuit case law and provide tips for practitioners preparing a patent damages case, with special emphasis on the entire market value rule, survey evidence, and comparable licenses.

Thursday, March 12, 2015

CLE on Patent Remedies and Patent Assertion Entities

Next Friday, March 20, I will be presenting a 6 1/2 hour continuing legal education program titled "Patent Remedies and Patent Assertion Entities" at the University of Minnesota Law School (part of our week-long "Super CLE" program).  Anyone unable to attend in person may participate through a live webcast available through WestLegalEdcenter, part of Thomson Reuters.  Information on registration and on all of the programs is available here.  Here is the blurb for my program: 
This course will provide a comprehensive guide both to the fast-changing law of patent remedies (injunctions, damages, and declaratory judgments) and to possible legislative and judicial responses to patent assertion entities (PAEs), companies that sometimes pejoratively are referred to as ‘patent trolls.’  The morning session will cover recent changes to the law of preliminary and permanent injunctions in the wake of eBay v. MercExchange, including Federal Circuit case law on irreparable harm, substantial merit, and causal nexus; whether PAEs, owners of standard-essential patents (SEPs), and other entities are now effectively precluded from obtaining injunctive relief; how courts determine ongoing royalties when they deny injunctions; and the availability of exclusion orders before the International Trade Commission.  In addition, it will cover the law of patent damages, including lost profits and reasonable royalties, with discussion focusing on matters such as use of the entire market value rule and the ‘book of wisdom’; the hypothetical bargain versus the analytical approach for calculating royalties; and the admissibility of expert testimony based on methodologies such as the Nash Bargaining Solution and conjoint analysis.  The afternoon session will cover accountings of infringers’ profits as a remedy for design patent infringement; the Supreme Court’s recent decisions on, and possible legislative changes to, the law on recovery of attorneys’ fees; developments in the law of enhanced damages for willful infringement; awards of prejudgment interest; and the law of declaratory judgments as reflected in the Supreme Court’s recent decisions in MedImmune and Medtronic.  Finally, the session will conclude with an overview of the theoretical and empirical evidence for and against charges that are sometimes leveled against PAEs, as well as various possible claims that might be brought against these entities under unfair competition, antitrust, consumer protection, or newly enacted state or federal laws.  Throughout, the course will focus principally on U.S. law but also, given the global nature of many patent disputes in the modern world, will highlight instances in which the law of other major patent systems is similar or different.  

Wednesday, March 11, 2015

Reetz et al. on Injunctions under the UPC System; Hoppe-Jänisch on Important German Patent Cases

1.  This article, from the March 2015 issue of GRUR/Int., just came to my attention.  The authors are Alexander Reetz, Camille Pecnard, Riccardo Fruscalzo, Ruud van der Velden, and Mark Marfé, and the paper is titled Die Befugnisse der nationalen Gerichte unter dem EPÜ und des Einheitlichen Patentgerichts (EPG) nach Art. 63 (1) EPGÜ zum Erlass von Unterlassungsverfügungen--eine rechtsvergleichende Untersuchung ("The Authority of National Courts Under the Unified Patent Agreement and of the Unified Patent Court according to Article 63(1) of the Agreement on the Unified Patent Court with respect to Granting Injunctions--A Comparative Investigation").  Here is the abstract (my translation from the German):  
Continental Europe and the United Kingdom provide different answers to the question whether, in a case in which patent infringement has been established, a court may specially refuse an injunction for the benefit of the owner of a European Patent on the ground of disproportionality.  The authors discuss the existing differences between continental Europe and the United Kingdom and will show that, in any event, the future Unified Patent Court can fall back upon a pan-European minimal consensus of the contracting states in answering the question whether proportionality should play a role under the Agreement on the Unified Patent Court and the 17th Draft of the Rules of Procedure for the Unified Patent Court.
I have not yet read the paper, but this certainly appears to be essential reading.  I hope to report back soon.  For previous discussion on this blog, see here, here, here, and here.

2.  In January and February I blogged about Daniel Hoppe-Jänisch's article Die Rechtsprechung der Instanzgerichte zum Patent- und Gebrauchsmusterrecht seit dem Jahr 2013 ("The Patent and Utility Model Case Law of the Lower Courts Since 2013"), which appeared in the December 2014 issue of GRUR RR.  An English-language version is now available here.