Thursday, July 30, 2015

Ninth Circuit Opinion in Microsoft v. Motorola: Analysis

As I mentioned earlier, today the Ninth Circuit affirmed Judge Robart's judgment in Microsoft v. Motorola (opinion here).  Bottom line:  the court's decision is consistent with the emerging consensus, both in the U.S. and abroad (as reflected in the CJEU's decision in Huawei two weeks ago), that a patent owner who has made a RAND (a/k/a FRAND) commitment is (generally speaking) precluded from seeking injunctive relief against a willing licensee, and that RAND royalties should not reflect holdup value.  Here are some highlights:

1.  The court begins by noting that "[s]tandardization provides enormous value to both consumers and manufacturers," "increases competition by lowering barriers to entry and adds value to manufacturers' products by encouraging production by other manufactures of devices compatible with them" (p.8).  At the same time, however:
. . . once a standard becomes widely adopted, SEP holders obtain substantial leverage over new product developers, who have little choice but to incorporate SEP technologies into their products. Using that standard development leverage, the SEP holders are in a position to demand more for a license than the patented technology, had it not been adopted by the SSO, would be worth. The tactic of withholding a license unless and until a manufacturer agrees to pay an unduly high royalty rate for an SEP is referred to as “hold-up.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1209 (Fed. Cir. 2014). “Royalty stacking” refers to the risk that many holders of SEPs will engage in this behavior, resulting in excessive royalty payments such that (1) the cumulative royalties paid for patents incorporated into a standard exceed the value of the feature implementing the standard, and (2) the aggregate royalties obtained for the various features of a product exceed the value of the product itself. Id.; see also Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 Tex. L. Rev. 1991, 2010–13 (2007); Amicus Br. of Public Knowledge at 11–20. 
To mitigate the risk that a SEP holder will extract more than the fair value of its patented technology, many SSOs require SEP holders to agree to license their patents on “reasonable and nondiscriminatory” or “RAND” terms. . . . Under these agreements, an SEP holder cannot refuse a license to a manufacturer who commits to paying the RAND rate (9-10). 
Elsewhere, the court states that "Motorola’s actions [seeking injunctive relief] were intended to induce hold-up, i.e., to pressure Microsoft into accepting a higher RAND rate than was objectively merited, and thereby to frustrate the purpose of the contract" (p.41);  that "The evidence that the rates Motorola sought were significantly higher than the RAND rate found by the court suggested that Motorola sought to capture more than the value of its patents by inducing holdup, and that it filed infringement actions to facilitate that strategy by preventing Microsoft from using its patents—and therefore from implementing the 802.11 and H.264 standards—until it obtained a license at a rate significantly higher than the RAND rate" (pp. 41-42); that "The very purpose of the RAND agreement is to promote adoption of a standard by decreasing the risk of hold-up" (citing Mark A. Lemley, Ten Things to Do About Patent Holdup of Standards (And One Not To), 48 B.C. L. Rev. 149 (2001)) (p.53); and that "The fact that Motorola’s patents were of minor import to the H.264 standard, for example, was evidence from which the jury could infer that demanding a 2.25% royalty rate was not a good-faith effort to realize the value of the technology, but rather an attempt to capitalize on the value of the standard itself—that is, to obtain the hold-up value" (p.56).  

I think the view of holdup expressed above is generally correct, though as Norman Siebrasse and I argue in a paper we have been working on over the past few weeks, standardization can result in three distinct economic effects, namely (1) the patent owner can use the threat of an injunction to extract a royalty that reflects the defendant's sunk costs and the high cost of switching to another technology; (2) the patent owner can extract a royalty that is disproportionate (in comparison with other SEPs) to the individual patent's contribution to the value of the standard; and (3) the patent owner can demand a royalty that reflects value resulting from the standard's widespread use due to network effects.  We argue that a FRAND royalty should not reflect the first two effects, but in our view it may reflect (3).  To date, however, in their discussions of holdup courts have not clearly distinguished among the three effects, and this opinion is no exception.

2.  The court affirms the judgment that Motorola was contractually obligated, by reason of the RAND commitments it made to IEEE and ITU, not to seek injunctive relief, and that doing so breached Motorola's duty of good faith and fair dealing (see pp. 7, 14, 40, 54).  I am not a contracts law expert, and the courts' conclusions on these matters may well be correct under the governing contract law.  I would note, however, that in some other countries RAND commitments may not be interpreted in the same manner, though liability may arise under antitrust law (as discussed by the CJEU in Huawei) or the abuse of right doctrine (see here), both of which are less likely to work in the U.S.   For discussion of differing views on the contract issue, see my paper here at pp.4-8, 37-38.    

3.  Much of the opinion is taken up with procedural matters which the court resolves in favor of Microsoft:  specifically, that the Ninth Circuit (not the Federal Circuit) has jurisdiction over this appeal under the law-of-the-case doctrine (pp. 16-23); that Motorola consented to have Judge Robart determine the RAND rate and range at a bench trial prior to submitting to a jury the question of whether Motorola breached its contractual obligations (pp. 24-28); and that Judge Robart did not clearly err in admitting (in the jury trial) portions of his findings of fact from the bench trial and testimony concerning the FTC's investigation of Google/Motorola's licensing practices (pp. 55-63).

4.  Now to the meat of the opinion:  did the district court correctly determine the RAND rate?  Yes, according to the Ninth Circuit.  First, the district court applied a "hypothetical agreement"  framework that was generally consistent with both "the Federal Circuit's patent law methodology," which "can serve as guidance in contract cases on questions of patent valuation," and with Motorola's own recommended approach (p.29):
Applying that approach, the district court sought to approximate the royalty rates upon which the parties would have agreed by setting up a hypothetical negotiation between the parties. In doing so, the court carefully thought through the “factors an SEP owner and implementer would consider” in an actual negotiation directed at licensing a patent subject to RAND commitments. The court then discussed each of Motorola’s fifteen H.264 patents and eleven 802.11patents, considering the objective value each contributed to each standard, given the quality of the technology and the available alternatives as well as the importance of those technologies to Microsoft’s business. Finally, the court performed a meticulous analysis of the testimony of eighteen witnesses, including executives, economists, and technology experts, to sort out which evidence to rely upon in determining the RAND royalty rate. Generally, the court credited Motorola’s experts; where it did not, it provided reasoned explanations for not doing so. . . .
Motorola’s central RAND-rate merits contention is that Judge Robart’s analysis failed to meet Georgia-Pacific’s factor fifteen criterion, as interpreted and applied by the Federal Circuit, and so constituted error. Several portions of the court’s findings of fact and conclusions of law do indicate that the court did to an extent take into account the present day value to Microsoft of Motorola’s patents. For example, the court noted that a third-party valuation of Motorola’s 802.11 SEPs was only somewhat probative because, at the time of the valuation, “Motorola’s 802.11 SEP portfolio” was much larger than the portfolio “as it exists today.”
This partial present-day focus did not, however, render the district court’s RAND-rate determination invalid. First, the Federal Circuit has “never described the Georgia-Pacific factors as a talisman for royalty rate calculations.” Ericsson, 773 F.3d at 1230.  . . . 
. . . An element of Microsoft’s claim is that Motorola maintained its demand of a 2.25% royalty rate throughout the proceedings, and also pressed its injunction suits even after Motorola was on notice that its actions were in tension with its RAND obligations. Given Microsoft’s argument that Motorola’s breach was ongoing, the district court could reasonably have concluded that it was appropriate to include the present-day value of Motorola’s SEPs as a factor in calculating the RAND rate-and-range for use in the breach-of-contract proceeding. 
Second, Motorola never specifies the past date the district court should have used. In pointing to “the time the infringement began, ” Georgia-Pacific, and subsequent cases applying its framework, referred to the date of the manufacturer’s first unlicensed use of the patented technology. 318 F. Supp. at 1120; see also Lucent Techs., 580 F.3d at 1324. But, as Motorola acknowledges, the “infringement” at issue in this case is Motorola’s breach of contract, not Microsoft’s use of Motorola’s patents. Motorola mentions both “the date Motorola sent the [offer] letters” and “the time right before Microsoft’s first [patent] infringement began” as possible hypothetical negotiation dates the court could have used, without specifying which is correct.
Motorola did not mention either date in putting forth its version of the hypothetical negotiation analysis in its posttrial brief. To assume the correct date would have been the date the breach of contract began is of no help, as the alleged breach of contract was not tied to any specific date. The jury could have found a breach of contract based on Motorola’s offer letters, its seeking a number of injunctions, or its overall course of conduct (pp. 29-32).
This is interesting, and probably right, but note that it doesn't take a position on the question of whether, in a  patent infringement case involving FRAND-encumbered SEPs, the date of the hypothetical negotiation should be a date just before the infringement began (as in a standard Georgia-Pacific analysis) or just before the standard was adopted.  The latter is probably the economically correct view in the SEP context, and it seems more consistent with Judge Robart's own view as expressed in paragraph 106 of his opinion (". . . the parties to a hypothetical negotiation under a RAND commitment would consider alternatives that could have been written into the standard instead of the patented technology. The focus is on the period before the standard was adopted and implemented (i.e., ex ante)"), as well as statements by Judge Holderman in Innovatio and Judge Posner in Apple v. Motorola).  Once the standard is adopted, the holdup problem may arise, whether or not the defendant has yet begun infringing.

5.  The court also approves of Judge Robart's consideration of the rates charged by the VIA Licensing 802.11 pool and the MPEG LA H.264 pool, noting that to account for differences between pool rates and negotiated rates "the court multiplied the pool rates by three" (p.35).  Though I have expressed some disagreement with the specifics of Judge Holderman's analysis related to the pool rates , I agree that such rates can be relevant and that, if anything, Judge Holderman's use of them may have been more favorable than necessary to Motorola (see here at pp. 47-50).  In addition, the court finds no clear error in Judge Robart's conclusion that the licenses Motorola suggested as comparable were in fact not comparable, because they were "too contextually dissimilar" (pp. 36-38).    

6.  The court finds that the jury had substantial evidence from which to conclude that Motorola sought injunctive relief for the purpose of "inducing holdup" (p.41), that this was indicative of bad faith (pp. 40-43), and that the Noerr-Pennington doctrine does not preclude liability for seeking an injunction under these circumstances (pp. 44-47) (though the court expresses agreement "with the Federal Circuit that a RAND commitment does not always preclude an injunctive action," for example where the defendant refuses a FRAND offer (p.47 n.19)).

7.  Finally, the court concludes that Motorola Microsoft was entitled to recover as damages for the breach the attorneys' fees it expended to defend itself against the actions for injunctive relief (pp. 47-54).

Ninth Circuit Affirms in Microsoft v. Motorola

Here's the opinion.  More later.

Wednesday, July 29, 2015

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

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

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

Monday, July 27, 2015

Hinkelmann on Japanese Patent Damages Cases

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

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

Thursday, July 23, 2015

Brazilian FRAND Ruling

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

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

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

Wednesday, July 22, 2015

Apple Files Response to Petition for Rehearing Regarding Design Patent Damages

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

Tuesday, July 21, 2015

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

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

Monday, July 20, 2015

Posner, Hovenkamp, Burshstein Respond to Kimble

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

Thursday, July 16, 2015

Huawei v. ZTE: Analysis

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

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

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

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

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

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

CJEU Judgment in Huawei v. ZTE

Here it is.  More later after I've read it.

Press Release on the CJEU Judgment in Huawei v. ZTE

The CJEU's press release is available here.  (Hat tip to IAM Magazine, first tweet I've seen on this.)  Still waiting for the judgment at 9:22 a.m. Central Time.  I'm monitoring the CJEU's website.

From the press release:
The bringing of an action for a prohibitory injunction against an alleged infringer by the proprietor of a standard-essential patent which holds a dominant position may constitute an abuse of that dominant position in certain circumstances
In particular, where the proprietor of the patent has undertaken in advance to grant third parties a licence on fair, reasonable and non-discriminatory terms, that proprietor must, before it brings such an action for an injunction prohibiting the infringement of its patent or for the recall of products for the manufacture of which that patent has been used, present to the alleged infringer a specific offer to conclude a licence . . .
In today’s judgment, the Court distinguishes actions seeking a prohibitory injunction or the recall of products from those seeking the rendering of accounts and an award of damages.
With regard to the first type of actions, the Court holds that the proprietor of a patent essential to a standard established by a standardisation body, which has given an irrevocable undertaking to that body to grant a licence to third parties on FRAND terms, does not abuse its dominant position by bringing an action for infringement seeking an injunction prohibiting the infringement of its patent or seeking the recall of products for the manufacture of which that patent has been used, as long as:
‒ prior to bringing that action, the proprietor has, first, alerted the alleged infringer of the infringement complained about by designating the patent in question and specifying the way in which it has been infringed, and, secondly, presented to that infringer, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, a specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated, and
‒ where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognised commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.
The Court has held, inter alia, that the alleged infringer which has not accepted the offer made by the proprietor of the SEP may invoke the abusive nature of an action for a prohibitory injunction or for the recall of products only if it has submitted to the proprietor of the SEP, promptly and in writing, a specific counter-offer that corresponds to FRAND terms.
With regard to the second type of actions, the Court holds that the prohibition of abuse of a dominant position does not, in circumstances such as those in the main proceedings, prevent an undertaking in a dominant position and holding a patent essential to a standard established by a standardisation body, which has given an undertaking to that body to grant licences for that patent on FRAND terms, from bringing an action for infringement against the alleged infringer of its patent with a view to obtaining the rendering of accounts in relation to past acts of use of that patent or an award of damages in respect of those acts of use. Such actions do not have a direct impact on standard-compliant products manufactured by competitors appearing or remaining on the market.

Wednesday, July 15, 2015

New Edition of the Véron Treatise on Saisies-Contrefaçon

I recently was pleased to receive a complementary copy of the trilingual (French, English, and German) version of the third edition of Véron et Associés' treatise Saisie-Contrefaçon.  (For readers who are not familiar with it, the saisie-contrefaçon is a pretrial order used in France to obtain evidence of infringement.  I briefly discuss the procedure in my book at p.230).  Dr. Klaus Grabinski (Judge of the German Federal Supreme Court) and Sir Robin Jacob (formerly Lord Justice of Appeal of the Court of Appeals of England and Wales) contribute forewords.  The book also includes a chapter on the saisie-description in Belgium, and annexes discussing among other things analogous procedures before the Unified Patent Court and national laws in other European countries.  Should be a very useful resource for European practitioners and scholars. 

Monday, July 13, 2015

Two Recent French Cases on Invalidation Actions/Declarations of Noninfringement

The first is Raccords et Plastiques Nicoll v. MEP, TGI Paris, Nov. 6, 2014, PIBD no. 1020, III-44, discussed in the April 2015 issue of Propriéte Industrielle by Jacques Raynard and Privat Vigand.  The plaintiff filed an action for a declaration of patent invalidity.  The defendant argued that, since a statutory amendment in 2008, the applicable statute of limitations for actions involving personal property (found in the French Civil Code article 2224) was five years, that the five year period began to run from the date on which the patent application had been published (February 11, 2005), and that the action (filed October 4, 2013) was therefore time-barred.  The plaintiff responded that the statute began to run from the date on which the patent owner had put it on notice of its alleged infringement (February 25, 2013).  The court agreed with the plaintiff, stating that the statute begins  to run from the moment when the plaintiff has had effective knowledge of the patent.  Professors Raynard and Vigand note some ambiguity whether article 2224 applies to such an action, but that the parties assumed it did.  Nevertheless, they argue that the rule the court announced goes too far in one direction and not far enough in another.  On the one hand, the date on which the statute begins to run should not be the date on which the plaintiff becomes aware of the patent, but the date on which it should have been aware of it.  On the other, it should not be enough that the plaintiff knew (or should have known) of the patent, but rather when it knew the ground for the patent’s invalidity.  They also argue that, in a passage concluding this potion of the opinion, the court meant to say that if the defendant had filed sued for infringement, the plaintiff would have been able to assert invalidity notwithstanding the statute of limitations (though they wonder whether a judgment of invalidity under the circumstances would be applicable only inter partes or erga omnes).

Second, in Bolton Manitoba SpA v. Reckitt Benckiser LLC, TGI Paris, Mar. 13, 2015, PIBD no. 1028, III-341, the plaintiff filed an action for a declaration of invalidity and noninfringement.  The court held that the five-run statute of limitations did not run from the date of publication, but rather from the date of grant.  On the other hand, the request for a declaration of noninfringement was not cognizable.  As I discuss in my book (p.281), under article L. 615-9 of the Intellectual Property Code:
Any person who proves working on the territory of a Member State of the European Economic Community, or real and effective preparations to that effect, may invite the owner of a patent to take position on the invocability of his title against such working, the description of which shall be communicated to him. If such person disputes the reply that is given to him or if the owner of the patent has not taken position within a period of three months, he may bring the owner of the patent before the Court for a decision on whether the patent constitutes an obstacle to the working in question, without prejudice to any proceedings for the nullity of the patent or subsequent infringement proceedings if the working is not carried out in accordance with the conditions specified in the description referred to in the above paragraph.
Here, the above conditions were not complied with, and while it would be permissible to file such a claim as a counterclaim to an action for infringement, adding it to a claim for a declaratory judgment of invalidity was not permissible absent a sufficient connection to that claim.  The two claims pursue different objectives.

Friday, July 10, 2015

Japan Fair Trade Commission Seeks Public Comments on Proposed FRAND Policy

Professor Masabumi Suzuki just called to my attention the following matter that will be of interest to readers of this blog.  On July 8, the Japan Fair Trade Commission (JFTC) published a press release seeking public comments on the partial amendment of its Guidelines for the Use of Intellectual Property Under the Antimonopoly Act.  Here is a link to the press release, which provides directions for interested parties to submit comments.  The Guidelines with the proposed amendments (Tentative Translation) are available here, and the Survey Report on Issues related to Essential Patent (Tentative Translation) is available here.  The proposed amendments would add the following subpart (e) to Part 3 ("Viewpoints from Private Monopolization and Unreasonable Restraint of Trade"), paragraph (1) ("Viewpoints from Private Monopolization"), subparagraph (1) ("Inhibiting the Use of Technology") (see pp. 10-11):
The standard setting organization or trade association (hereinafter referred to as the "SSO") generally specifies in the document (IPR Policy) describing principles for license of patents (including the other intellectual property rights) essential for implementation of the functions and effects prescribed in the standards (hereinafter referred to as the “Essential Patent”) that, in order to prevent exercise of right in respect of Essential Patents from impeding research & development, production or sale of the products adopting the standards and to broadly diffuse the standards, it makes the participants in standard setting clearly show whether they hold any Essential Patent (including those pending) and their intention for licensing for fair, reasonable and non-discriminatory conditions (such conditions are generally called “FRAND conditions”). An Essential Patent (including those pending) holder’s declaration in writing to show that it is willing to grant licenses under FRAND conditions to the SSO is referred to as the “FRAND Declaration”. According to the IPR policy, the SSO will study change of the standards to exclude the technology protected by such if such declaration is not made. Since it can be considered that those who research & develop, produce or sell the products adopting the standards can access all Essential Patents under FRAND license conditions, they can positively make investments required for research & development, production or sale of the products adopting the standards.
Essential Patent is essential for realization of the functions and effects prescribed in the standards, and its use is indispensable in the market of the products adopting the standards diffused broadly.
Under such circumstances, refusal to license or claim for injunction to a party who is willing to take a license by a FRAND-encumbered Essential Patent holder, or refusal to license or claim for injunction to a party who is willing to take a license by a FRAND-encumbered Essential Patent holder when the standard which includes the Essential Patent had already been set and subsequently, the FRAND declaration for that Essential Patent was withdrawn, generally makes it difficult to research & develop, produce or sell the products adopting the standards diffused broadly. Therefore, such acts may fall under the exclusion of business activities of other entrepreneurs.
The description above shall be applied no matter whether the act is taken by the party which has the Essential Patent at the of the standard setting or by the party which accepts assignment of Essential Patent or is entrusted to manage the Essential Patent after standard setting.
Regarding the fact that an exercise of the right in respect of Essential Patent against FRAND declaration makes it difficult to research & develop, produce or sell the products adopting the standard diffused broadly, whether a party is not a “willing licensee (who willing to take a license on FRAND terms)” should be strictly judged based on the situation of each case. Therefore, for example, in case the parties do not reach an agreement of license conditions even after a certain period of negotiations, a party which shows its intention to determine the license conditions at court or through arbitration procedures is deemed to be the “willing licensee”. Even if a party which intends to be licensed challenges dispute validity, essentiality or possible infringement of the Essential Patent, the fact itself should not be considered as grounds to deny that the party is a “willing licensee”.
Second, they would add the following subparagraph (iv) to Part 4 ("Viewpoints from Unfair Trade Practices"), paragraph 2 ("Inhibiting the Use of Technology") (p.17):
The acts described in Part3-(1), (i), (e), that is, refusal to license or claim for injunction to a party who is willing to take a license by a FRAND-encumbered Essential Patent holder, or refusal to license or claim for injunction to a party who is willing to take a license by a FRAND-encumbered Essential Patent holder when the standard which includes that Essential Patent had already been set and subsequently, the FRAND declaration for that Essential Patent was withdrawn, generally makes it difficult to research & develop, produce or sell the products adopting the standards diffused broadly. As the entrepreneurs who research & develop, produce or sell the products adopting the standards will be deprived of trading opportunities or impeded the ability of the party to compete, such acts adversely affect the competition in the market of the products adopting the standards and tend to impede fair competition.
Therefore, such acts are considered to be Unfair Trade Practices (Paragraph (2) and (14) of the General Designation), even if the acts do not substantially restrict competition in the product market described above and are not considered to be Private Monopolization. 
Interested readers may want to read the Guidelines with proposed amendments and the survey carefully to see how everything fits together.  In addition, here is a link to the Antimonopoly Act, and here is a link to the Designation of Unfair Trade Practices (Fair Trade Commission Public Notice No. 15 of June 18, 1982).

It will be interesting to see if the Guidelines are adopted.  Meanwhile, we await the CJEU's judgment in Huawei v. ZTE, which is due to be released next Thursday, July 16.

Wednesday, July 8, 2015

Seaman on Ongoing Royalties

Christopher Seaman has published an article titled Ongoing Royalties in Patent Cases After eBay: An Empirical Assessment and Proposed Framework, 23 Texas Intellectual Property Law Journal 203 (2015).  I'm not finding a copy of the article on the journal's website, but here is a link to what appears to be the final version of the article on ssrn.  Here is the abstract:
The Supreme Court’s landmark decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 288 (2006), significantly changed the remedial landscape for patent owners, holding that a permanent injunction would not automatically follow a finding that an asserted patent was infringed and not invalid. As a result, a substantial number of prevailing patentees have been denied the ability to exclude future acts of infringement. eBay’s impact is perhaps most acute for patent assertion entities (“PAEs”) — firms that own, license, and assert patents in litigation, but do not themselves directly practice the patented technology — who rarely can satisfy eBay’s four-factor test.
In eBay’s wake, the Federal Circuit has approved an alternative prospective remedy called an ongoing royalty. But despite lower courts’ increasing use of this remedy, numerous questions about the structure and methodology for determining an ongoing royalty remain unresolved. This Article addresses the issue of ongoing royalty awards from both an empirical and doctrinal perspective. First, it reports the results of an original empirical study regarding ongoing royalty awards by district courts since eBay. Second, it proposes a new framework for computing an ongoing royalty that requires consideration of actual or anticipated changes to the relevant product market, as well as potential future alternatives to the patented technology, in determining the amount of an ongoing royalty award.
Professor Seaman reports, among other things, that from the date of the eBay decision through January 2015 there have been 57 ongoing royalty decisions in all, involving 54 separate awards (10 in 2014); that 40% (23) of these cases were litigated in the Eastern District of Texas; that the leading technologies in these cases (accounting for 81% of them) were software (21), electronics (14), and medical devices (11); and that the mean postjudgment royalty was 1.84 and the median 1.34.   

Monday, July 6, 2015

Westerngeco v. ION: No Lost Profits on Lost Extraterritorial Sales

Last week, the Federal Circuit handed down opinions in WesternGeco L.L.C. v. ION Geophysical Corp. (link here).  At issue are four patents asserting claims "relating to technologies used to search for oil and gas beneath the ocean floor" (p.3).  WesternGeco makes and sells products embodying the patented technologies, and its accused its competitor ION of violating 35 U.S.C. § 271(f)(1) and (2).  I'll focus exclusively on the remedies issues.

In relevant part, § 271(f) reads: 
(1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
The Federal Circuit affirmed the jury's finding of liability under § 271(f)(2) (and did not reach the issue of liability under § 271(f)(1)), but the majority (in an opinion by Judge Dyk, joined by Judge Hughes) concluded that this did not entitle WesternGeco to lost profits on certain contracts that WesternGeco believes it would have earned, but for the violation.  

To understand the ruling requires some factual background.  According to the court (pp. 16-17):
WesternGeco makes the Q-Marine [described earlier in the opinionas "its commercial embodiment of the patented technologies"] domestically and performs the surveys abroad on behalf of its customers—oil companies looking to extract oil from the sea floor. ION makes the DigiFINs [described earlier as the "allegedly patent-practicing device"] domestically and then ships them overseas to its customers, who, in competition with WesternGeco, perform surveys abroad on behalf of oil companies. WesternGeco identified ten surveys for which it believes that, but for ION’s supplying of DigiFINs to ION’s customers, WesternGeco would have been awarded the contract. These ten surveys allegedly would have generated over $90,000,000 in profit. According to WesternGeco, ION’s customers would not have been able to win the contracts if they did not have access to the DigiFINs. Thus, according to WesternGeco, but for ION’s sales to its customers, WesternGeco would have earned over $90 million in profit from the ten lucrative services contracts performed abroad. 
ION argues that WesternGeco cannot receive lost profits resulting from the failure to win these contracts. The service contracts were all to be performed on the high seas, outside the jurisdictional reach of U.S. patent law. There is also no contention that the service contracts were entered into in the United States.
Invoking the presumption against extraterritoriality, and characterizing § 271(f) as expanding territorial scope only to the extent of treating the export of components of a patented system the same way as the export of a finished system, the court sided with ION (pp. 18-19):
It is clear that under § 271(a) the export of a finished product cannot create liability for extraterritorial use of that product. The leading case on lost profits for foreign conduct is Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348 (Fed. Cir. 2013). There, the patentee, a chip supplier, lost contracts to supply a prospective customer with computer chips in the United States and abroad because the accused infringer became a competitor for such contracts as a result of the U.S. infringing sales. If the accused infringer had been precluded from U.S. infringement, the patentee alleged that the accused infringer could not have competed for the contracts which necessarily involved supplying chips both in the United States and abroad. The patentee argued that it should recover world-wide lost profits. 
We rejected that argument: “[Our patent laws] do not thereby provide compensation for a defendant’s foreign exploitation of a patented invention, which is not infringement at all.” Power Integrations, 711 F.3d at 1371. Rather, “we find neither compelling facts nor a reasonable justification for finding that [the patentee] is entitled to ‘full compensation’ in the form of damages based on loss of sales in foreign markets which it claims were a foreseeable result of infringing conduct in the United States.” Id. at 1372. “[T]he entirely extraterritorial production, use, or sale of an invention patented in the United States is an independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement.” Id. at 1371–72. Under Power Integrations, WesternGeco cannot recover lost profits resulting from its failure to win foreign service contracts, the failure of which allegedly resulted from ION’s supplying infringing products to Western-Geco’s competitors.
The majority also responded to dissenting Judge Wallach's arguments in support of a lost profits award (pp. 20-22):
First, the dissent identifies Supreme Court cases it believes approved awards of lost profits for foreign sales, citing Goulds’ Manufacturing Co. v. Cowing, 105 U.S. 253 (1881), Dowagiac Manufacturing, Co. v. Minnesota Moline Plow Co., 235 U.S. 641 (1915), and Duchesne, 60 U.S. 183. None of these cases is remotely similar to this one. To be sure, they suggest that profits for foreign sales of the patented items themselves are recoverable when the items in question were manufactured in the United States and sold to foreign buyers by the U.S. manufacturer. See Goulds’ Mfg., 105 U.S. at 254; Dowagiac Mfg., 235 U.S. at 642–43; Duchesne, 60 U.S. at 196. There is no such claim here. Rather, the claim is for lost profits from the use abroad of the items in question. . . .
Second, the dissent argues that the surveys should be recoverable as “convoyed sales” of the domestically manufactured components of the infringing DigiFINs. But, WesternGeco did not raise this argument before the district court or this court. And, the dissent points to no case extending the convoyed sales doctrine to cover sales of related products or services abroad. . . .
Third, the dissent expresses concern that our ruling today might effectively prevent WesternGeco from recovering lost profits at all, as the surveys were conducted on the high seas and were outside of the territorial reach of any patent jurisdiction in the world. This may or may not be the case. Indeed, WesternGeco does not contend that it is barred from recovering in the jurisdiction in which the services contracted was negotiated and signed, nor does it contend that it is barred from recovering in the jurisdiction from which the ship performing the seismic surveys is flagged. In any event, the possible failure of liability provides no basis for ignoring the presumption against extraterritoriality.
As a result, the court held that WesternGeco could recover only a reasonable royalty--noting, however, that  "[t]he extent to which these royalties may be affected by lost profits suffered abroad is an issue not presented here. See Union Carbide Chems. & Plastics Tech. Corp. v. Shell Oil Co., 425 F.3d 1366, 1378 (Fed. Cir. 2005), overruled on other grounds, Cardiac Pacemakers, Inc. v. St. Jude Med., Inc., 576 F.3d 1348, 1365 (Fed. Cir. 2009) (en banc); see also Warsaw Orthopedic, Inc. v. NuVasive, Inc., 778 F.3d 1365, 1378 n.7 (Fed. Cir. 2015)" (p.20 n.7).  The issue of whether a royalty can reflect foreign use that allegedly is attributable to an initial act of infringement in the U.S. is currently on appeal in the Carnegie-Mellon case (see blog post here.)

Also on the issue of royalties, the court affirmed the district court's decision to exclude testimony from WesternGeco's expert  that an appropriate royalty would have been 10% of the $3.3 billion in revenue that ION's customers received from performing surveys with ION's DigiFIN, reasoning that the court did not abuse its discretion given that the proposed royalty "would have exceeded ION's revenue by four times" (p.24).  The court also affirmed the decision not to enhance damages, on the ground that ION's defenses were reasonable.

Though I need to give the matter some more thought, I'm inclined to think the majority view is correct. WesternGeco may have lost sales, and thus profits, to foreign customers as a result of ION's alleged conduct in violation of § 271(f), but to allow recovery would seem to undermine the presumption against extraterritoriality.  The causal chain has to stop somewhere.  I am more receptive in such cases to the idea of basing a reasonable royalty on the value of the use to the defendant, where such value contemplates sales to foreign buyers; though there too I'm not entirely sure I've made up my mind.  This is quite a complex area of damages law.

Thursday, July 2, 2015

Attorneys' Fees to Octane Fitness on Remand; Cert. Petitions Filed re Standard for Enhanced Damages

Hat tip to my colleague Prentiss Cox for bringing to my attention this July 1 opinion from Judge Ann Montgomery determining, on remand, that Octane Fitness is entitled to recover attorneys' fees under 35 U.S.C. section 285.  The amount of the award is yet to be determined.  For my blog post on the Supreme Court decision from last year, see here.

In other news, both Halo and Stryker have filed cert. petitions (Numbers 14-1513 and 14-1520, respectively) asking the Supreme Court to eliminate willfulness as a precondition for an award of enhanced damages, and also to eliminate the Seagate requirement of a showing of objective and subjective recklessness, which is simialr to the standard for exceptional case that the Court discarded last year.  (Hat tip to BNA Bloomberg's Patent, Trademark, and Copyright Journal.)  Here is Halo's question presented (there is a second question relating to the definition of "sale" or "offer to sell" under section 271(a), which I will skip):
1. Whether the Federal Circuit erred by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. § 284, that is the same as the rigid, two-part test this Court rejected last term in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) for imposing attorney fees under the similarly-worded 35 U.S.C. § 285.
And here are Stryker's:
1. Has the Federal Circuit improperly abrogated the plain meaning of 35 U.S.C. § 284 by forbidding any award of enhanced damages unless there is a finding of willfulness under a rigid, two-part test, when this Court recently rejected an analogous framework imposed on 35 U.S.C. § 285, the statute providing for attorneys’ fee awards in exceptional cases?
2. Does a district court have discretion under 35 U.S.C. § 284 to award enhanced damages where an infringer intentionally copied a direct competitor’s patented invention, knew the invention was covered by multiple patents, and made no attempt to avoid infringing the patents on that invention?
While there is certainly an arguable case for both petitioners' positions, in my opinion the policy arguments for awarding attorneys' fees are much stronger than the arguments for awarding enhanced damages (as suggested by the fact that in many countries attorneys' fees are routinely awarded, while enhanced or punitive damages almost never are).  A return to something like the pre-Seagate standard for enhanced damages would in my view be a colossal mistake.  But we'll see what happens.  So far the Supreme Court has no IP cases yet on its docket for 2015-16.  For previous blog posts on Halo and Stryker, see here and here.

This is a busy day.  The Federal Circuit also decided an interesting damages case today, Westerngeco L.L.C. v. ION Geophysical Corp.  I'll be back either tomorrow or Monday with a write-up.